What is a fair price for this call option

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Question - A stock, at beginning of the year, is selling for $24. The same stock, at end of year, is expected to sell at $30 if economy experiences a boom and only at $20 if economy goes into a recession, each with equal 50% probability.

There is a bond which is selling at unit price of $40 today and guarantees $41.50 at end of the year.

Now there is a third security, namely, the stock call option with strike price of $27.50.

Required - What is a fair price for this call option?

Reference no: EM132951835

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