Return to Problem 36. Value the call option using the risk-neutral shortcut described in the box on
Question:
Return to Problem 36. Value the call option using the risk-neutral shortcut described in the box on page 736. Confirm that your answer matches the value you get using the two-state approach
Problem 36.
You are attempting to value a call option with an exercise price of $100 and 1 year to expiration. The underlying stock pays no dividends, its current price is $100, and you believe it has a 50% chance of increasing to $120 and a 50% chance of decreasing to $80. The risk-free rate of interest is 10%. Calculate the call option's value using the two-state stock price model.
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Using the riskneutral shortcut we must first calculate the riskneutral pr...View the full answer
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