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Category > Business & Finance Posted 23 May 2017 My Price 6.00

You are attempting to value a call option with an exercise price of $100

 

  1. You are attempting to value a call option with an exercise price of $100 and one year to expiration. The underlying stock pays no dividends, its current price is $100, and you believe it has a 50% chance of increasing to $120 and a 50% chance of decreasing to $80. The risk-free rate of interest is 10%. Calculate the call option’s value using the two-state stock price model. (LO 16-2)

 

 

 
 

Answers

Alpha Geek
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Status NEW Posted 23 May 2017 10:05 AM My Price 6.00

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file 1495536556-Answer.docx preview (185 words )
Y-----------ou -----------are----------- at-----------tem-----------pti-----------ng -----------to -----------val-----------ue -----------a c-----------all----------- op-----------tio-----------n w-----------ith----------- an----------- ex-----------erc-----------ise----------- pr-----------ice----------- of----------- $1-----------00 -----------and----------- on-----------e y-----------ear----------- to----------- ex-----------pir-----------ati-----------on.----------- Th-----------e u-----------nde-----------rly-----------ing----------- st-----------ock----------- pa-----------ys -----------no -----------div-----------ide-----------nds-----------, i-----------ts -----------cur-----------ren-----------t p-----------ric-----------e i-----------s $-----------100-----------, a-----------nd -----------you----------- be-----------lie-----------ve -----------it -----------has----------- a -----------50%----------- ch-----------anc-----------e o-----------f i-----------ncr-----------eas-----------ing----------- to----------- $1-----------20 -----------and----------- a -----------50%----------- ch-----------anc-----------e o-----------f d-----------ecr-----------eas-----------ing----------- to----------- $8-----------0. -----------The----------- ri-----------sk------------fre-----------e r-----------ate----------- of----------- in-----------ter-----------est----------- is----------- 10-----------%. -----------Cal-----------cul-----------ate----------- th-----------e c-----------all----------- op-----------tio-----------nâ€-----------™s -----------val-----------ue -----------usi-----------ng -----------the----------- tw-----------o-s-----------tat-----------e s-----------toc-----------k p-----------ric-----------e m-----------ode-----------l.Â----------- (L-----------O -----------16------------2) ----------- Se-----------p 2-----------2 2-----------015----------- 11-----------:31----------- AM----------- A-----------nsw-----------er:----------- -----------Giv-----------en:-----------
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