FINANCE
Mock Exam with solutions(2)

Shares in lmn plc currently trade at 945 there is a

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Question 16 Shares in LMN plc currently trade at £9.45. There is a 55% probability that the market price will be £12.00 in 6 months' time and a 45% chance that the market price will be £8.00. The discount rate is 6.00% per annum. Using a single-period binomial valuation approach, what is the value of a 6 month call option on LMN shares with a strike price of £9.45? Since a 6 month call, use 6/2=3% as the discount rate Value of the call is 12-9.45=2.55 if the price goes up and 0 otherwise Probability weighted average call value 0.55*2.55+0.45*0=1.4025 Discounted back to today 1.4025/1.03=1.36
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