In a one-period binomial model,assume that the current stock price is $100,and that it will rise to $110 or fall to $90 after one month.If an investment of a dollar at the risk-free rate returns $1.001668 after one month,what is the expected gross return of a 100-strike one-month call option under the risk-neutral probabilities?
A)1.0010
B)1.0017
C)1.0100
D)1.0167

Question

Quizplus · Accepted Answer

The risk-neutral probability of the stock price rising is calculated using the formula: p = (1.001668 - 0.9) / (1.1 - 0.9) = 0.50834. The expected gross return of the call option is then calculated as: 0.50834 * (110 - 100) + 0.49166 * 0 = 5.0834. The expected gross return is 1 + (5.0834 / 100) = 1.0017.

In a One-Period Binomial Model,assume That the Current Stock Price