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A stock selling for $25 today will, in 1 year, be worth either $35 or $20. If

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A stock selling for $25 today will, in 1 year, be worth either $35 or $20. If the interest rate is 8%, what is the value today of a one-year call option on the stock with exercise price $30? Use the simultaneous equation approach of section 16.2 to price the option.

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The stock is selling for 25 and the stock would go up either by 40 or down by 20 The interest rate i...View the full answer


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Financial Modeling

Financial Modeling

ISBN: 9780262027281

4th Edition

Authors: Simon Benninga

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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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