Final answer:
Valuing a 6-month call option using the two-period risk-neutral pricing model involves calculations that are not directly related to the simple bond example provided but take similar principles into account, such as discounting future payments and considering risk-free rates.
Step-by-step explanation:
The student's question is centered on using a two-period risk-neutral pricing model to determine the present value of a 6-month call option with a strike price of 50, where the risk-free rate is 6%, dividend yield (δ) is 0.05, volatility (σ) is 0.5, and the current stock price (S) is 45. In this scenario, we would normally calculate the expected up and down movements of the stock, the risk-neutral probabilities, and then discount the expected payoff of the option back to the present value using the risk-free rate.
However, this requires additional steps compared to the simple bond calculations provided in the reference material. To value the bond, as per the example, we would discount each future payment (interest and principal) back to the present at the discount rate (8% or 11% as mentioned). For the bond with an 8% interest rate, future payments of $240 and principal repayment of $3,000 are discounted at the same rate of 8% to find the present value. If rates rise to 11%, the bond's present value would decrease due to the higher discount rate applied to the same cash flows.