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Suppose ABCD's stock price is currently $50. In the next six months it will either fall to $40 or rise to $60. What is the current value of a six-month call option with an exercise price of $50?

a. $5.39
b. $15.00
c. $8.25
d. $8.09

Respuesta :

ogorwyne

Answer:

A. $5.39

Explanation:

The interest rate has been given as 2%

First we get the call option pay off.

The Call option payoff is calculated as $60-$50

This gives us $10 and 0

We will get two equations

60x+1.02y=10 -----1

II) 40x+1.02y=0----2

We proceed to solve for both x and y in this equations using the simultaneous linear equation

Then we get x=0.5 (which is option delta)and the valifor y, y= -19.6

Then the call option price would be

=0.5x50-19.61

= 25-19.61

= $5.39

Therefore option a is the answer

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