Question

To calculate C30, we must multiply Qu by the option price in the 'up' state and Qd by the option price in the 'down' state. (.65317.83)+(.29032.19) = 5.75. What is the value of C30? 1) 5.75 2) 6.75 3) 7.75 4) 8.75

Answer 1

The value of C30 is 5.75.

Step-by-step explanation:

To calculate the value of C30, the formula involves multiplying the probability of an 'up' state (Qu) by the option price in the 'up' state and the probability of a 'down' state (Qd) by the option price in the 'down' state.

The calculation is as follows: (.65 * 7.83) + (.29 * 2.19) = 5.75. This represents the expected value of the option at time 30.

The calculation considers the probabilities of the two states ('up' and 'down') and the corresponding option prices in each state. It reflects the weighted average of the possible outcomes, providing an estimate of the option's value at the specified time.

In finance, such calculations are fundamental for evaluating the potential value of financial instruments under different market conditions.

In this case, the value of C30 is determined by considering the probabilities and prices associated with the 'up' and 'down' states.

In summary, the correct answer is 1) 5.75, representing the calculated value of C30 based on the given probabilities and option prices.