Suppose you have a European call option on a non-dividend paying stock that matures in three years from now with a strike price of X = 60. In addition, assume that the interest rate is 10% per year.

1. Draw a position diagram of the call option.

2. Suppose you use a binomial model to calculate the price of this option. Briefly describe the two methodologies to find the option price today.

3. Assume that the share price is currently at S = 50. Furthermore, assume that the share price can either increase by 25% a year, or decrease by 20%. Calculate the call option price using the Binomial method.

Answer rating: 100% (QA)

1 Sno Share Price Strike Price Value of Option 1 50 60 0 2 55 60 0 ... View the full answer