Question

You are now analyzing a call option for Airbus's stock, which is currently priced at $213 per share (stock price). The option's exercise price is $214. The option has a three-month time to maturity. the 3-month risk-free rate is 1.0% and the market return is expected to be 9.87%. You expect the following possible stock prices in three months ( $170 or $227 ). What is the value of the option today based on the risk-neutral probability method? Round to the nearest 0.01 ___.

Answer 1

The value of the option today is approximately $0.65.

Step-by-step explanation:

To value the call option using the risk-neutral probability method, we need to calculate the expected payoff of the option at expiration for each possible stock price.

For a stock price of $170, the option will expire worthless since it is below the exercise price of $214.

For a stock price of $227, the option will have a payoff of $13 ($227 - $214).

To calculate the expected payoff, we weigh the possible payoffs by their respective probabilities:

Expected Payoff = (0.35 * $0) + (0.60 * $0) + (0.05 * $13) = $0 + $0 + $0.65 = $0.65

Therefore, the value of the option today is approximately $0.65.