The Single-Period Binomial Option Pricing Approach
The current price of a stock is $16. In 6 months, the price will be either $20 or $12. The annual risk-free rate is 7%. Find the price of a call option on the stock that has a strike price of $15 and that expires in 6 months. (Hint:Use daily compounding.) Round your answer to the nearest cent. Assume a 365-day year. Do not round your intermediate calculations.
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Now assume, the current price of a stock is $21. In 1 year, the price will be either $27 or $15. The annual risk-free rate is 7%. Find the price of a call option on the stock that has a strike price is of $25 and that expires in 1 year. (Hint: Use daily compounding.) Round your answer to the nearest cent. Assume 365-day year. Do not round your intermediate calculations.
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