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Calculate the theoretical price of call with binomial model

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Reference no: EM132965062

Based on today's quote for ABC stock and option with 6 months to expiration:

Current stock price for ABC: 100

Stock pays no dividends.

Strike price of call option: 97

Annual risk-free rate: .03

Expected return of stock (arith mean): .12

Standard deviation (volatility) of annualized return: .3

Market price of call option: 10

Problem 1. Use the binomial model and follow the steps below to estimate the theoretical price of the above ABC call option. Assume that the stock price can either rise to 120.62 or drop to 89.36 in 6 months.

a. Calculate delta.

b. Calculate the theoretical price of call with binomial model.

c. According to your result, is the call currently over or underpriced?

Reference no: EM132965062

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