The current price of a stock is 40. After one period, it will be worth either 41.80 or 38.20 with probabilities 0.60 and 0.40, respectively. The risk-free rate of interest over this period, in gross terms, is 1.05 (i.e., a dollar invested at the beginning of the period returns 1.05 at the end of the period). The no-arbitrage value of a one-period call option on this stock with a strike of 40
A) is approximately 1.03.
B) is approximately 1.81.
C) can be anything between 0 and 1.80.
D) does not exist in the given setting.

Question

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The Answer of The current price of a stock is 40. After one period, it will be worth either 41.80 or 38.20 with probabilities 0.60 and 0.40, respectively. The risk-free rate of interest over this period, in gross terms, is 1.05 (i.e., a dollar invested at the beginning of the period returns 1.05 at the end of the period). The no-arbitrage value of a one-period call option on this stock with a strike of 40
A) is approximately 1.03.
B) is approximately 1.81.
C) can be anything between 0 and 1.80.
D) does not exist in the given setting.

The Current Price of a Stock Is 40