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Ivenika [448]
4 years ago
13

You are attempting to value a call option with an exercise price of $100 and one year to expiration. The underlying stock pays n

o dividends, its current price is $100, and you believe it has a 50% chance of increasing to $116 and a 50% chance of decreasing to $84. The risk-free rate of interest is 8%. Calculate the call option’s value using the two-state stock price model.
Business
1 answer:
matrenka [14]4 years ago
4 0

Answer:

The answer is "11.11"

Explanation:

Given values:

The chances of increasing value by 50% is = 116

The chances of decreasing value by 50% is = 84

So, the two possible stock prices are:

S+  = 116 and S- = 84

The exercise price is = 100 so, possible called value are

Chance of increase (Ci) = 116-100 = 16

Chance of decrease (Cd)= 84 -100 = -16   it is - value that's why we avoid this so it equal to 0.

Formula:

edge ratio = \frac{(Ci - Cd)}{(S+ - S-)}      

                  = \frac{(16 - 0)}{(116 - 84)} \\\\=\frac{16}{32}\\\\= \frac{1}{2}\\\\= 0.5

To develop a risk-free makes the image of one stock share and dual calling in paper. The actual cost of risk-free image is = exercise price- 2C0

= 100 -2C0

= 84 after some years.

The given value is = 84

time = 1 year

interest rate= 8%

interest:

= \frac{84}{(1+0.08)^1} \\\\= \frac{84}{1.08} \\\\= \frac{84}{\frac{108}{100}} \\\\ = \frac{84 \times 100}{108}\\\\ = 77.78

if the edged position is equivalent to the actual payout cost:

\Rightarrow 100 - 2C0 =77.78 \\\\\Rightarrow 100 -77.78  =  2C0 \\\\\Rightarrow 22.22  =  2C0 \\\\\Rightarrow  C0 = \frac{22.22}{2} \\\\\Rightarrow C0= 11.11

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Explanation:

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If dividend is expected to grow at a given rate , the value of a share is calculated using the formula below:  

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3 0
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Answer:

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