Risk neutral probability and value of call option

Reference no: EM13102629

1. A stock price is currently $100. Over each of the next two three-month periods it is expected to increase by 10% or fall by 10%. Consider a six-month European call option with a strike price of $105. The risk-free rate is 8%. What is the risk-neutral probability of a 10% rise in both quarters?

a. 0.10

b. 0.24

c. 0.36

d. 0.60

e. 0.84

2. A stock price is currently $100. Over each of the next two three-month periods it is expected to increase by 10% or fall by 10%. Consider a six-month European call option with a strike price of $105. The risk-free rate is 8%. What is the value of the call option?

a. $6.25

b. $5.55

c. $5.00

d. $4.50

e. $4.05

Reference no: EM13102629

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