A stock with a current price of $28 will either move up by a factor of 1.10 or down by a factor of .90 each period over the next two periods.The risk-free rate of interest is 4 percent.What is the current value of a call option with a strike price of $30?
A)$1.36
B)$1.49
C)$1.71
D)$2.09
E)$2.13

Question

Quizplus · Accepted Answer

The binomial option pricing model can be used to calculate the current value of the call option. The stock can move to $33.88 or $22.68 in the first period, and then to $37.27, $30.49, $20.41, or $18.22 in the second period. The call option will be exercised only if the stock price is above $30. The risk-neutral probabilities and discounting at the risk-free rate are used to find the expected payoff, which results in a current call option value of approximately $1.49.

A Stock with a Current Price of $28 Will Either