Exhibit 22.6
Use the Information Below for the Following Problem(S)
The following information is provided in the context of a two period (two six month periods) binomial option pricing model. A stock currently trades at $60 per share, a call option on the stock has an exercise price of $65. The stock is equally likely to rise by 15% or fall by 15% during each six month period. The one-year risk free rate is 3%.
-Refer to Exhibit 22.6.Calculate the possible prices of the stock at the end of one year.
A) $69, $51, $79.35
B) $51, $79.35, $58.65
C) $79.35, $58.65, $43.35
D) $58.65, $43.35, $14.35
E) None of the above

Question

Quizplus · Accepted Answer

Current stock price = $60
Price in one year if stock rises 15% per six month period = 60(1.15)(1.15)= $79.35
Price in one year if stock rises 15%,then falls 15% = 60(1.15)(0.85)= $58.65
Price in one year if stock declines 15% per period = 60(0.85)(0.85)= $43.35

Exhibit 22.6 Use the Information Below for the Following Problem(S)