Calculate the adjusted stock price at time zero

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Reference no: EM132065803

A nine-month American call option on RAYCO stock has an exercise price of $25. The current RAYCO stock price is $25 and the stock price is expected to either rise 15% or fall 12% every three months. RAYCO is expected to pay a dividend of $1.00 in eight months' time. The risk-free rate is 3% p.a. (continuously compounded) for all maturities. The option is to be priced using a thrcx: period binornial model.

Question-

(a) Calculate the adjusted stock price at time zero.

(b) Draw the stock price tree diagram for the adjusted stock price and show teh expiration date payoffs on the call option.

Reference no: EM132065803

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