Suppose you are asked to value, using a four-period risk-neutral binomial approach, an at-the-money call option. The stock price is $180 today but will, per period, either increase by 10% with 70% of chance or decrease by 5% with 30% of chance. The risk-free rate is 4% and the stock pays no dividends. What would be the value of this call option in period 3 assuming that the price has constantly increased up to that point?

Suppose you are asked to value, using a four-period risk-neutral binomial approach, an at-the-money call option. The stock price is $180 today but will, per period, either increase by 10% with 70% of chance or decrease by 5% with 30% of chance. The risk-free rate is 4% and the stock pays no dividends. What would be the value of this call option in period 3 assuming that the price has constantly increased up to that point?

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 4P: Put–Call Parity The current price of a stock is $33, and the annual risk-free rate is 6%. A call...

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