Question: A company is currently awaiting the outcome of a major lawsuit. This is expected to be known within one month. The stock price is currently $20. If the outcome is positive, the stock price is expected to be $25 24 at the end of one month. If the outcome is negative, it is expected to be $16 18 at this time. The one-month risk-free interest rate is 8% per annum.
a. What is the risk-neutral probability of a positive outcome?
b. What are the values of one-month call options with strike prices of $18, $20, $22, and $24?