Consider a binomial world in which the current stock price of 80 can either go up by 10 percent or down by 8 percent.The risk-free rate is 4 percent.Assume a one-period world.Answer questions 12 through 15 about a call with an exercise price of 80.
-What would be the call's price if the stock goes down?
A)8.00
B)3.60
C)0.00
D)9.00
E)none of the above

Question

Quizplus · Accepted Answer

If the stock goes down by 8 percent, its new price would be 80 * (1 - 0.08) = 80 * 0.92 = 73.6. Since the exercise price of the call is 80, and the stock price is below this (73.6), the call would not be exercised because it's out of the money. Therefore, its value would be 0.00.

Consider a Binomial World in Which the Current Stock Price