A one-year call option contract on Cheesy Poofs Co. stock sells for $1,330. In o

Question

A one-year call option contract on Cheesy Poofs Co. stock sells for $1,330. In one year, the stock will be worth $65 or $86 per share. The exercise price on the call option is $78. What is the current value of the stock if the risk-free rate is 3 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

A one-year call option contract on Cheesy Poofs Co. stock sells for $1,330. In one year, the stock will be worth $65 or $86 per share. The exercise price on the call option is $78. What is the current value of the stock if the risk-free rate is 3 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Explanation / Answer

ANSWER:    

The larger the degrees of freedom, the lower the variance of t, so the smaller the tail probabilities are. This explains why the probability in Question 73 is smaller than that in Question 74.  

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