Consider a two-period (t=0,1,2) world where the stock of ABC Company is selling for $200 at t=0. In every period, which is one year long, the stock price can either increase by 10% or drop by 20%. The market is offering a European call option on this stock with a strike price of $205 and a government-issued zero-coupon bond, a bond maturing one year from now and the option maturing two years from now. The bond is selling for $860 at the present. 

Assume that interest rates remain constant through time.

Answer rating: 100% (QA)

To value the call option we must first calculate the possible stock prices at t1 and t2 At t1 the st... View the full answer