A stock is currently selling for $50. The stock price could go up by 10% or fall by 5% Each month. The monthly interest rate is 1% (periodic rate). Calculate the price of a European call option on the stock with an exercise price of $50 and a maturity of two months. (use the two-stage binomial method)
A) $5.10
B) $2.71
C) $4.78
D) $3.62

Question

Quizplus · Accepted Answer

Using the two-stage binomial method, we calculate the possible stock prices at maturity, the option payoffs, and then discount them back to the present value using the risk-neutral probability. The correct calculation results in a call option price of $2.71.

A Stock Is Currently Selling for $50