Use the information for the question(s)below.
The current price of KD Industries stock is $20.In the next year the stock price will either go up by 20% or go down by 20%.KD pays no dividends.The one-year risk-free rate is 5% and will remain constant.
-Using the binomial pricing model,the calculated price of a one-year call option on KD stock with a strike price of $20 is closest to:
A)$2.40.
B)$2.00.
C)$2.15.
D)$1.45.

Question

Quizplus · Accepted Answer

The binomial pricing model calculates the option price by considering the possible future stock prices and the risk-free rate. The up and down factors are 1.2 and 0.8, respectively. The risk-neutral probability is calculated using the risk-free rate. The expected payoff of the option is then discounted back to the present value to find the option price, which is closest to $2.40.

Use the Information for the Question(s)below