Consider a one-period binomial model of 12 months.Assume the stock price is $54.00,σ = 0.25,r = 0.04 and the exercise price of a call option is $55.What is the forecasted price of the stock given a downward movement during the year?
A) $43.77
B) $ 45.28
C) $48.98
D) $51.84

Question

Quizplus · Accepted Answer

The forecasted price of the stock given a downward movement can be calculated using the formula for the downward movement in a binomial model, which is $S_d = S_0 \times e^{(r - \sigma^2/2)T - \sigma\sqrt{T}}$, where $S_0$ is the current stock price, $r$ is the risk-free rate, $\sigma$ is the volatility, and $T$ is the time in years. Substituting the given values ($S_0 = 54$, $r = 0.04$, $\sigma = 0.25$, $T = 1$) into the formula gives a downward price movement to approximately $43.77.

Consider a One-Period Binomial Model of 12 Months