A binomial call option premium is calculated as A)C₀ = [qC_uT + (1 - q)C_dT] / (1 + r_$) B)C₀ = [qC_dT + (1 - q)C_uT] / (1 + r_$) C)C₀ = [qC_uT + (1 - q)C_dT] / (1 - r_$) D)C₀ = [qC_dT + (1 - q)C_uT] / (1 - r_$)

Question

Quizplus · Accepted Answer

The correct formula for calculating a binomial call option premium involves discounting the expected value of the option at the future points (up and down) back to the present, using the risk-free rate. The formula in choice A correctly represents this calculation, where q is the risk-neutral probability of the stock price going up, (1-q) is the probability of it going down, and r is the risk-free rate.

A Binomial Call Option Premium Is Calculated as