Suppose the current share price of Dimension stock is $46. One year from now, this stock will sell for either $38 or $52 a share. T-bills currently yield 3.3 percent. What is the per share value of a Dimension call option if the exercise price is $40 per share and the expiration is one year from now?

Question

Quizplus · Accepted Answer

The call option will be worth $12 if the stock price is $52 (since $52 - $40 = $12) and $0 if the stock price is $38. The expected payoff is calculated using risk-neutral probabilities. The risk-free rate is 3.3%, so the present value of the expected payoff is $12 * (1/1.033) = $11.61. The correct choice is the closest to this value, which is $7.90.

Suppose the Current Share Price of Dimension Stock Is $46