Question: a) (10 points) In your own words define a call option (in general any asset). Describe the payoff for someone who purchased a call option

a) (10 points) In your own words define a call option (in general any asset). Describe the payoff for someone who purchased a

a) (10 points) In your own words define a call option (in general any asset). Describe the payoff for someone who purchased a call option on a stock. b) (15 points) A stock is selling for $25 today. In 1 year, be worth either $35 (with 40% probability) or $20 (with 20% probability). If the interest rate is 8%, what is the value today of a one-year call option on the stock with exercise price $30? Hint: Calculate the state prices quand quand then the value bf the option (you can use the template I have for you with binomial figure for Question 4 in Excel). Pano Yaz Tipi Hizalama Sayi E28 fox A B D E F G H 1 BINOMIAL OPTION PRICING 2 Up 3 Down 4 5 Initial stock price 6 Interest rate 7 Exercise price oo a Call option 10 11 ??? 12 13 State prices 14 qu 15 90 16 17 18 Call price 19 20 21 22 23

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