8. Problem 18.08 (Binomial Model)

Misuraca Enterprise's current price is $45 per share. Call options for this stock exist that permit the holder to purchase one share at an exercise price of $50. These options will expire at the end of 1 year, at which time Misuraca's stock will be selling at one of two prices, $40 or $55. The risk-free rate is 3.5%. As an assistant to the firm's treasurer, you have been asked to perform the following task to arrive at value of the firm's call options.

1. Find the range of values for the ending stock price and the call option at the option's expiration in 1 year. Round your answers to the nearest cent.

   Range of value for the ending stock price: $

   Range of value for the call option: $

2. Equalize the range of payoffs for the stock and the option. Round your answer to four decimal places.

3. Create a riskless hedged investment. What is the portfolio in 1 year? Round your answer to the nearest cent.

   $

4. What is the cost of the stock in the riskless portfolio? Round your answer to the nearest cent.

   $

5. What is the present value in the riskless portfolio? Round your answer to the nearest cent.

   $

6. From your answers in parts d and e, what is the value of the firm's call option? Round your answer to the nearest cent.

   $