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Svetach [21]
3 years ago
12

. 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 th

e 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.)
Business
1 answer:
Masteriza [31]3 years ago
4 0

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

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