USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The following information is provided in the context of a two-period (two six-month periods) binomial option pricing model. A stock currently trades at $60 per share, and a call option on the stock has an exercise price of $65. The stock is equally likely to rise by 15 percent or fall by 15 percent during each six-month period. The one-year risk free rate is 3 percent.
-Refer to Exhibit 16.2. Calculate the price of the call option after the stock price has already moved down in value once (C_d) .

Question

Quizplus · Accepted Answer

After the stock price moves down once, it will be $60 * 0.85 = $51. Since the exercise price is $65, the call option is out of the money, and its value is $0.