The price of Build A Fire Corp. stock will be either $90 or $116 at the end of t

Question

The price of Build A Fire Corp. stock will be either $90 or $116 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 5 percent. a. Suppose the current price of the company's stock is $99. What is the value of the call option if the exercise price is $85 per share? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Value of the call option b. Suppose the exercise price is $110 and the current price of the company's stock is $99. 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.) Value of thec

Explanation / Answer

u=116/99=1.171717
d=90/99=0.909091
p=(e^(rt)-d)/(u-d)=(e^(5%*1)-0.909091)/(1.171717-0.909091)=0.541379
1-p=0.458621

1
Value of call option now=e^(-5%*1)*(0.541379*max(116-85,0)+0.458621*max(90-85,0))=18.14551
2
Value of call option now=e^(-5%*1)*(0.541379*max(116-110,0)+0.458621*max(90-110,0))=3.089854

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