The current stock price of Johnson and Johnson is $64 and the stock does not pay dividends. The instantaneous risk free rate of return is 5%. The instantaneous standard deviation of J&J's stock is 20%. You wish to purchase a call option on this stock with an exercise price of $55 and an expiration date 73 days from now.
-The stock price of Ajax Inc.is currently $105.The stock price a year from now will be either $130 or $90 with equal probabilities.The interest rate at which investors can borrow is 10%.Using the binomial OPM,the value of a call option with an exercise price of $110 and an expiration date one year from now should be worth __________ today.
A) $11.59
B) $15.00
C) $20.00
D) $40.00

Question

Quizplus · Accepted Answer

The binomial option pricing model calculates the option's value by considering the possible future stock prices and the risk-free rate. Given the stock prices of $130 and $90 with equal probabilities, the expected stock price is $110. The call option with an exercise price of $110 will have a payoff of $20 if the stock price is $130 and $0 if the stock price is $90. Discounting the expected payoff at the risk-free rate gives the option's present value.

The Current Stock Price of Johnson and Johnson Is $64