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The stock price of Apax Inc. is currently $105. The stock price a year from now will be either $130 or $90 with equal probabilities. The interest rate at which investors can borrow is 10%. Using the binomial OPM, the value of a call option with an exercise price of $110 and an expiration date 1 year from now should be worth __________ today.
a. $11.59.
b. $15.00.
c. $20.00.
d. $40.00.

Respuesta :

Answer: 11.59

Explanation:

From the question, we are told that the stock price a year from now will be either $130 or $90 with equal probabilities. This means that the prices have a 50% chance of occuring.

Therefore, the value of a call option with an exercise price of $110 and an expiration date 1 year from now should be worth:

= 0.5[(105 - (90/1+0.10)]

= 0.5(105 - 81.82)

= 0.5(23.18)

= 11.59

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