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Unformatted text preview: $7.75 = [Exercise Price  $65.00]  $3.50  $1.25 $12.50 = Exercise Price  $65.00 Exercise Price = $65.00 + $12.50 = $77.50 6. Assume that a stock is currently selling for $50. The stock price could go up by 10% or fall by 2% each month. The monthly interest rate is 1% (periodic rate). Calculate the price of a call option on the stock with an exercise price of $40 and a maturity of two months. (use the binomial method) A. $12.66 * B. $10.79 C. $11.47 D. $ 9.99 E. $13.84 u = 1.10; d = .98; P = (1.01  .98)/(1.10  .98) = .25; (1P) = 1  .25 = .75 P = $50 P 1 = ($50)(1.10) = $55.00 ($50)(0.98) = $49.00 P 2 = ($50)(1.10)(1.10) = $60.50 ($50)(1.10)(0.98) = $53.90...
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 Spring '08
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