Price a 6 months European-style call option when the volatility for the first 3 months is 30 per cent per year and the volatility for the second three-month period is 40 per cent per year. The current stock price is €120, the strike price for the call is €125, and the continuously compounded risk-free interest rate is 4 per cent per year? There are no dividends on the stock. Use 3 month steps?

Answer rating: 100% (QA)

To price the Europeanstyle call option we can use the binomial option pricing model with 3month step... View the full answer