The current price of a stock is $30. Over the next 6 months, the price will either
Question:
The current price of a stock is $30. Over the next 6 months, the price will either increase by a factor (u) of 1.2 or decrease by a factor (d) of 0.8330. The same is true for the next 6-month period. The annual risk-free rate is 6%. Find the price of a call option on the stock that has a strike price of $32 and that expires in one year.
Step by Step Answer:
t 10 n 2 S 30 X 32 r RF 6 u 12000 d 08333 The call option price is 30495 The stock prices are Tim...View the full answer
Intermediate Financial Management
ISBN: 9780357516669
14th Edition
Authors: Eugene F Brigham, Phillip R Daves
Related Video
A call option is a type of financial contract that gives the holder the right, but not the obligation, to buy an underlying asset (such as a stock, commodity, or currency) at a specified price (called the strike price) within a specified period of time. When an investor purchases a call option, they are essentially betting that the price of the underlying asset will rise above the strike price before the option\'s expiration date. If the price of the asset does rise above the strike price, the investor can exercise the option by buying the asset at the strike price and then selling it at the higher market price, thereby earning a profit. Call options are often used as a speculative investment strategy, as they allow investors to potentially profit from the upward movement of an asset without having to actually own the asset itself. They are also commonly used as a hedging tool to protect against potential losses in a portfolio.
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