European Call Option Using Binominal model
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The current price of a risk free pure discount bond with face value of $1,000,000 and maturity of one month from now is $995,000. The stock of Bluebell Inc. is selling now for $200.00 per share. In one month it will sell for either $225.50 or $185.75. The stock will pay no dividends over the next three months. What must be the price now of a European call option on Bluebell stock with an exercise price of $205.00 and expiration date in one month if there are to be no arbitrage opportunities? How many shares of Bluebell stock are in the portfolio that replicates the call option.
Use Binominal model in calculations.
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Solution Summary
The expert calculates the value of an European call option using Binominal model.
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