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Calculate the value of european call option

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Reference no: EM133073587

Consider a European call option on a non-dividend paying stock with a strike price $60 and expiration in 6 months. The current stock price is $55. The stock's volatility is 18%. Over each of the next two three-month periods the stock price is expected to go up by 9% or down by 9%. The risk-free interest rate is 5% per annum with continuous compounding for all maturities.

(a) Use a two-step binomial tree to calculate the value of this European call option. Show your step-by-step workings.

Note: No need to draw a binomial tree in the answer field. Just show your calculations.

(b) Use the Black-Scholes-Merton model to calculate the value of this European call option. Show your step-by-step workings.

(c) Compare the results obtained in (a) and (b). Do you expect them to be identical? Why/why not?

(d) If this option is an American option rather than a European option (all else staying the same), briefly describe how you will value this option (no calculations needed) and why.

(e) What is the Black-Scholes-Merton delta of this European call option?

Reference no: EM133073587

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