A stock has a beginning market value of $70. It can either increase in value 30% each year or decrease in value by 30%. A 3-year European call option written on the stock has an exercise price of $70. The risk-free rate of return is 5% per year. What is the current equilibrium price of the call option if you maintain a riskless portfolio by readjusting your relative positions in stocks and puts t the end of each year? Please operate with 2 decimals, show all work, and choose the closest answer. MAKE SURE TO WORKOUT CLEARLY THE STEPS TO AVOID S0% PENALTY.

A stock has a beginning market value of $70. It can either increase in value 30% each year or decrease in value by 30%. A 3-year European call option written on the stock has an exercise price of $70. The risk-free rate of return is 5% per year. What is the current equilibrium price of the call option if you maintain a riskless portfolio by readjusting your relative positions in stocks and puts t the end of each year? Please operate with 2 decimals, show all work, and choose the closest answer. MAKE SURE TO WORKOUT CLEARLY THE STEPS TO AVOID S0% PENALTY.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter20: Financing With Derivatives

Section20.A: The Black-scholes Option Pricing Model

Problem 1P

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