Suppose IBM is currently selling for 100 per share, the one period risk free rate is 8% and IBM pays no dividends over the period. Consider a one period European call on IBM with K=$50.

a. IBM will either go up by 20% or down by 5%. What is the value of the call one period from expiration?

b. Now suppose IBM will go up by 40% or down by 40%. 

c. What is the value of the call one period from expiration? Explain any change or lack of it relative.

 Now suppose IBM will go up by 40% or down by 60%. What is the value of the call one period from expiration? Explain any change or lack of it relative

Answer rating: 100% (QA)

To calculate the value of the European call option we can use the riskneutral valuation approach assuming a oneperiod binomial model Lets calculate th... View the full answer