Question
You are offered a European Call option. This means you will have the option, but not the obligation, to buy the stock at the strike
You are offered a European Call option. This means you will have the option, but not the obligation, to buy the stock at the strike price K of $100. The price of the stock today is $90. Your time discount rate is Beta=0.98, the risk-less rate of interest is 3%.
The price of the stock follows the following process over two periods: with probability 75% the price will not change from period 0 to period 1, but with probability 25% will go up to $130. Then from period 1 to period 2, with probability 25% the price will stay the same, and with probability 75% the price will go down by 20%.
How much would you be willing to pay as of period 0 for this option?
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