A SunSet Co.customer would like to obtain a 3-month option to purchase additional units of a product for $77 each.This product currently sells for $76 each.Assume u equals 1.1502 and d = .8694.Approximately what price per unit should SunSet charge for this option if the annual risk-free rate is 2.8 percent?
A)$4.79
B)$5.98
C)$6.17
D)$6.02
E)$5.07

Question

Quizplus · Accepted Answer

The price of the option can be calculated using the Binomial Option Pricing Model. This model considers the up and down movements in the price, the risk-free rate, and the time to expiration to determine the fair value of the option. Given u = 1.1502, d = .8694, the current price of $76, the strike price of $77, and the risk-free rate of 2.8%, we can calculate the expected price of the option. The correct answer, after performing these calculations, is approximately $5.07. This involves calculating the expected payoff in both the up and down scenarios, discounting them back to the present value at the risk-free rate, and then averaging them to get the price of the option.