The price of Build A Fire Corp. stock will be either $54 or $87 at the end of th

Question

The price of Build A Fire Corp. stock will be either $54 or $87 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 2 percent.

Suppose the current price of the company's stock is $63. What is the value of the call option if the exercise price is $50 per share? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Suppose the exercise price is $80 and the current price of the company's stock is $63. What is the value of the call option now? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

The price of Build A Fire Corp. stock will be either $54 or $87 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 2 percent.

Explanation / Answer

Current price of stock = 63

Up move = 87$

Down move= 54$

Risk neutral probablity= 1+rf-d/u-d

= P= 1.02-1.143/1.389-1.143= 0.123/0.246= 0.5

1-p= 0.5

At expiry payoff= {(87-50)*0.5+(54-50)*0.5}= 20.5$ value of call option.

At expiry payoff( when K= 80)= 0 as the option expires worthless.

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