Exhibit 14-2
USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT QUESTION(S)
The information provided is relevant in the context of a one period (one year) binomial option pricing model. A stock currently trades at $50 per share, a call option on the stock has an exercise price of $45. The stock is equally likely to rise by 25% or fall by 25%. The one-year risk free rate is 2%.
-Refer to Exhibit 14-2. Calculate the possible prices of the stock one year from today.
A) $37.50 or $17.50.
B) $62.50 or $37.50.
C) $62.50 or $17.50.
D) $50 or $45.
E) None of the above.

Question

Quizplus · Accepted Answer

If the stock rises the price one year from now will be = 50(1 + 0.25) = $62.50
If the stock falls the price one year from now will be = 50(1 - 0.25) = $37.50

Exhibit 14-2 USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT QUESTION(S)