Question

A one-year call option contract on Cheesy Poofs Co. stock sells for $1,250. In one year, the stock will be worth $57 or $78 per share. The exercise price on the call option is $70. What is the current value of the stock if the risk-free rate is 2 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:

Value of call option = 3.92

Explanation:

Stock price - Exercise price, 0

When share price is $57,

Payoff = Max (57 - 70, 0)

Payoff = Max (-13, 0)

Payoff = 0

When share price is $78

Payoff = Max (78 - 70, 0)

Payoff = Max (8, 0)

Payoff = 8

Value of call option = (Expected payoff * Probaliltiy) / (1 + Interest for the period)

Considering probability as 50% for each stock

Value of call option = (0 * 0.5 + 8 * 0.5) / (1 + 0.02)

Value of call option = 3.92