The price of a stock is currently $50. Over the course of the next year, the price is anticipated to rise to $55 or decline to $46. If both outcomes are equally likely and the risk free interest rate is 3%, what is the price of a one year call option with an exercise price of $50 using the binomial model?
A) $2.43
B) $2.50
C) $2.66
D) $2.70

Question

Quizplus · Accepted Answer

The binomial model calculates the option price by considering the possible future stock prices and their probabilities. The expected payoff is discounted at the risk-free rate. Here, the expected payoff is $2.50, and when discounted at 3%, it results in a call option price of approximately $2.43.

The Price of a Stock Is Currently $50