What is the value of the call option

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Reference no: EM131813986

Consider a binomial world in which a stock, over the next year, can go up in value by 20% (with a probability of 55%) or down by 10% (with a probability of 45%). The stock is currently trading at $10. The risk-free interest rate is 5%.

Consider a call option on this stock, which expires in one year and has a strike price of $11.

(a) What is the value of the call option?

(b) If the call option was trading for $0.32, what is the arbitrage strategy?

Reference no: EM131813986

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