Question

Assume that the current price of a stock is $80 and that 1 year from now the stock will be worth either $90 or $75. The exercise price of a call option for this stock is $74. Assuming a riskless interest rate of 6% per year (and discrete compounding), what is the call option price

Answer 1

Answer: $17.71

Step-by-step explanation:

Calculation of delta = (90 - 74) + (75 - 74) / 90 - 75

= 16 + 1 / 15

= 1.13

Calculation of futurevalue of portfolio = (90 * 1.13) - 16 = 85.7

Present value of portfolio = 85.7 / 1.03 = 83.20

Present value of delta share = 74 * 1.13 = 65.49

Value paid by call holder = 83.20 - 65.49 = 17.7