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Suppose we have both a European call option and put option with an exercise price of $53 and the underlying stock is currently priced at $50. We are to note also that both options will expiry in six months. Further, market surveys suggest that the price of the stock can either go up by 20% or decrease by 25%. The current risk-free rate of interest is 2% per annum.
Required:
(a) What is the expected price of the underlying asset at expiry date?
(b) What is the value of the call option, using the binomial model?
(c) If the put option is selling for $4.80, what should be the price of the call option to avoid arbitrage?
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You come across a European call that has 6 months to expiration and has an expiration price of $30 which is priced at $2 by the market.
When the option expires, the value of the underlying asset is $54. What is your pay-off and profit / loss?
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