A stock has a 15 percent change of moving either up or down per period and is currently priced at $25. Using a one period binomial model, and assuming that the risk-free rate is 10 percent, complete the following. a. Determine the possible stock prices at the end of the first period. b. Calculate the intrinsic values at expiration of an at-the-money European call option. c. Find the value of the option today.

A stock has a 15 percent change of moving either up or down per period and is currently priced at $25. Using a one period binomial model, and assuming that the risk-free rate is 10 percent, complete the following. a. Determine the possible stock prices at the end of the first period. b. Calculate the intrinsic values at expiration of an at-the-money European call option. c. Find the value of the option today.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter12: The Cost Of Capital

Section: Chapter Questions

Problem 22P

See similar textbooks

Similar questions

Binomial Model The current price of a stock is 20. In 1 year, the price will be either 26 or 16. The annual risk-free rate is 5%. Find the price of a call option on the stock that has a strike price of 21 and that expires in 1 year. (Hint: Use daily compounding.)
Put–Call Parity The current price of a stock is $33, and the annual risk-free rate is 6%. A call option with a strike price of $32 and with 1 year until expiration has a current value of $6.56. What is the value of a put option written on the stock with the same exercise price and expiration date as the call option?
A stock is trading at $80 per share. The stock is expected to have a yearend dividend of $4 per share (D1 = $4), and it is expected to grow at some constant rate, g, throughout time. The stock’s required rate of return is 14% (assume the market is in equilibrium with the required return equal to the expected return). What is your forecast of gL?
An analyst has modeled the stock of a company using the Fama-French three-factor model. The market return is 10%, the return on the SMB portfolio (rSMB) is 3.2%, and the return on the HML portfolio (rHML) is 4.8%. If ai = 0, bi = 1.2, ci = 20.4, and di = 1.3, what is the stock’s predicted return?