Question

. The current price of a stock is $50. In 1 year, the price will be either $65 or $35. The annual risk-free rate is 10%. Find the price of a call option on the stock that has an exercise price of $55 and that expires in 1 year. (Hint: Use daily compounding.)

Answer 1

Answer:

The correct answer will be "6.11008554". Further explanation is given below.

Explanation:

The given values are:

The current stock's price

= $50

Annual rate

= 10%

Exercise price

= $55

Expiry time

= 1 year

Now,

On applying the formula, we get

⇒  $\frac{(MAX(65-55,0))-MAX(35-55,0)}{65-35}\times \frac{(MAX(65-55,0))-MAX(35-55,0)}{65-35}\times \frac{(MAX(65-55,0))-MAX(35-55,0)}{(\frac{1+10 \ percent}{365} )^{365}}$⇒  $6.11008554$