National Consolidated Acme Co. (NCAC) stock could be one of five possible prices

Question

National Consolidated Acme Co. (NCAC) stock could be one of five possible prices on January 15, 2016, the third Friday in January. The prices and the probability that the stock ends up at each price are given in the following table:

Probability

.2

.3

.1

.3

.1

Stock Price

40

45

50

55

60

For each of the following questions, be sure to show all of your work. Assume in each that markets are efficient.

a. What is the current price of NCAC shares?

b. What would be the premium of a January 45 NCAC call?

c. What would be the premium of a January 50 NCAC put?

Probability

.2

.3

.1

.3

.1

Stock Price

40

45

50

55

60

Explanation / Answer

a) Current price of NCAC = 0.2 * 40 + 0.3 * 45 + 0.1 * 50 + 0.3 * 55 + 0.1 * 60 = $49

b) Premium of a January 45 NCAC call = Underlying price - Strike price = 49 - 45 = $4

c) Premium of a January 50 NCAC put = Strike price - Underlying price = 50 - 49 = $1

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