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tensa zangetsu [6.8K]
4 years ago
8

Use the two state call option value in this problem. Data: S0=130 ; X=143 ; 1+r=1.1. The two possibilities for ST are 160 and 10

9. Calculate the value of a call option on the stock with an exercise price of $143.
Business
1 answer:
sergejj [24]4 years ago
5 0

Answer:

10.3

Explanation:

The computation of the value of a call option is shown below:

But before that we need to do the following calculations

P = (r - d) ÷ (u - d)

where

r = 1.1

d = down price ÷ current price

= 109 ÷ 130

= 0.838

u =  up price ÷ current price

= 160 ÷ 130

= 1.231

Now placing these values

= (1.1 - 0.838) ÷ (1.231 - 0.838)

= 0.6667

Now the value of the call option is

= (cu × p) + cd × (1 - p) ÷ R

= (17 × 0.6667) + 0 × (1 - 0.6667) ÷ 1.1

= 10.3

The cu could come from i.e. payoff in that case when the option is exercised

= 160 - 143

= 17

cd = payoff in that case when the option is not exercised

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