Stock price is $ 100. The stock is not callable. Puts on this stock (X=$ 110, T=1 year) are worth $ 20; where 'X' is the exercise price and 'T' is the maturity. Risk-free rate is 10% per year. Hypothetically, if this stock was to be callable (X=$ 110, T=1 year) from the investors then what would be the fair price for such a callable stock today?

Answer rating: 100% (QA)

SOLUTION To value a callable stock we need to use a pricing model that takes into account the possibility of the stock being called away before maturity One such model is the Binomial Option Pricing M... View the full answer