One year from now, a stock is expected to be priced at either $36 or $49. Currently the stock is selling for $38.20 while Treasury bills are yielding 2.5%. What is the value of a twelve-month call
Option with an exercise price of $40?
A) $0
B) $1.44
C) $2.13
D) $3.08
E) $4.45

Question

Quizplus · Accepted Answer

The call option value is calculated using the risk-neutral valuation method. The risk-neutral probability of the stock being $49 is calculated, and then the expected payoff of the call option is discounted back at the risk-free rate.

One Year from Now, a Stock Is Expected to Be