Possible prices for the stock after one year

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Reference no: EM131012451

Suppose the price of a stock is today is $100. We would like to use the binomial pricing model to price a call option on this stock with exercise price $100 and expiring in one year. We break the year into two 6-months consecutive periods. We know that after the first 6-month period the price of the stock will have evolved with either a multiplying factor of 0.8 or multiplying factor of 1.2. From that point, after the next 6-months the price of the stock will have evolved with either a multiplying factor of 0.8 or a multiplying factor of 1.2. Suppose risk-free interest rate is 2 percent.

a. Find the possible prices for the stock after one year.

b. Find the payoffs of the call option after one year.

c. Find the prices of the call option today.

Reference no: EM131012451

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