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24 March, 21:19

Assume that the current price of a stock is $80 and that 1 year from now the stock will be worth either $90 or $75. The exercise price of a call option for this stock is $74. Assuming a riskless interest rate of 6% per year (and discrete compounding), what is the call option price

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  1. 24 March, 21:34
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    Answer: $17.71

    Explanation:

    Calculation of delta = (90 - 74) + (75 - 74) / 90 - 75

    = 16 + 1 / 15

    = 1.13

    Calculation of futurevalue of portfolio = (90 * 1.13) - 16 = 85.7

    Present value of portfolio = 85.7 / 1.03 = 83.20

    Present value of delta share = 74 * 1.13 = 65.49

    Value paid by call holder = 83.20 - 65.49 = 17.7
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