A stock with a current price of $18 will either move up by a factor of 1.2 or down by a factor of 0.9 each period over the next two periods.The risk-free rate of interest is 4.5 percent.What is the current value of a call option with a strike price of $20?
A) $1.02
B) $1.08
C) $1.17
D) $1.21
E) $1.27

Question

Quizplus · Accepted Answer

S₀ = $18 S₁ = $18(1.2) = $21.60 or $18(0.90) = $16.20 S₂ = $18(1.2)² = $25.92 or $18(1.2)(0.90) = $19.44 or $18(0.90)² = $14.58 Intrinsic values = $5.92 or $0 or $0 at stock prices of $25.92, $19.44, and $14.58 respectively. At stock price $21.60: 11ea6d0e_c3d3_3620_b3c7_5161b046ed9b_TB1223_00 At stock price $16.20: 11ea6d0e_c3d3_3621_b3c7_fbee063fa52b_TB1223_00 At stock price $21.60: 11ea6d0e_c3d3_3622_b3c7_5f41519315b5_TB1223_00 At stock price $16.20: 11ea6d0e_c3d3_5d33_b3c7_1de767136dcf_TB1223_00 At stock price $18: 11ea6d0e_c3d3_5d34_b3c7_8f8a73e65c54_TB1223_00 11ea6d0e_c3d3_5d35_b3c7_2345ff5d374e_TB1223_00

A Stock with a Current Price of $18 Will Either