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Binomial Model for Valuing a Call Option

The current price of a stock is $20. In 1 year, the price will be either $26 or $16. The annual risk-free rate is 5%. Find the price of a call option on the stock that has a strike price of $21 and that expires in 1 year.

Solution Summary

This solution uses the binomial model for valuing a call option. Calculations and tree diagram are provided in the attached Excel file.

$2.19