5. Given: Today's stock price is 37. One month from now, the stock price will be either 35 or 40. If it is 35, then the following month the stock price will be either 31 or 37. If it is 40 one month from now, then the following month the price will be either 37 or 45. The risk-free rate of interest is 1% per month. How much should one be willing to pay today for a call option on the stock with K = 35 and T = 2 months? Construct the binomial tree for a European call option. At each node, provide the call premium (1.e., value) as well as \Delta and B.

Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter5: Financial Options
Section: Chapter Questions
Problem 4MC
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5. Given: Today's stock price is 37. One month from now, the stock price will be either 35 or 40. If it is 35, then the following month the stock price will be either 31 or 37. If it is 40 one month from now, then the following month the price will be either
37 or 45. The risk-free rate of interest is 1% per month. How much should one be willing to pay today for a call option on the stock with K = 35 and T = 2 months? Construct the binomial tree for a European call option. At each node, provide the call
premium (1.e., value) as well as \Delta and B.
Transcribed Image Text:5. Given: Today's stock price is 37. One month from now, the stock price will be either 35 or 40. If it is 35, then the following month the stock price will be either 31 or 37. If it is 40 one month from now, then the following month the price will be either 37 or 45. The risk-free rate of interest is 1% per month. How much should one be willing to pay today for a call option on the stock with K = 35 and T = 2 months? Construct the binomial tree for a European call option. At each node, provide the call premium (1.e., value) as well as \Delta and B.
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