Calculate the value of a european call option

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A stock index is currently trading at 50. Paul Tripp, CFA, wants to value two-year index options using the binomial model. In any year, the stock will either increase in value by 20% or fall in value by 20%. The annual risk-free interest rate is 6%. No dividends are paid on any of the underlying securities in the index.

a. Construct a two-period (two-year) binomial tree for the value of the stock index. In each year, the stock will either increase in value by 20% or fall in value by 20%

b. Calculate the value of a European call option on the index with an exercise price of 60

Reference no: EM132651294

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