The common stock of Westover Foods is currently priced at $28.80 a share.One year from now,the stock price is expected to be either $25 or $30 a share.The risk-free rate of return is 4.2 percent.What is the current value of one call option on this stock if the exercise price is $27.50?

Question

Quizplus · Accepted Answer

Number of options needed = ($30 - $25)/(2.50 - 0) = 2$28.80 = 2 C₀ + [$25/(1 + 0.042)]; C₀ = $2.40

The Common Stock of Westover Foods Is Currently Priced at $28.80