Hi-
I am trying to understand the answer for this problem:
The current price of a stock is $30. In each of two time steps, where each time step is three months, the stock may go up by 8% or down by 8%. For example, the stock might go up twice in a row to realize a price of $30*1.08*1.08 = $34.99; or the stock might go down twice is a row to realize a price of $30*0.92*0.92 = $25.39. The riskfree rate is 4%. What is the implied noarbitrage price of a European call option with six months to maturity (T =0.5) on the stock with a strike price of $30?
In your solution, you provided 2.7816 as the discounted value of the average weighted from the two step to one step. But, if I see, 4.992 + 0 / 2 = 2.496. If this is discounted to previous stage, it would be 2.496 * e ^ -4% * 1 = 2.3981, but you indicated the value as 2.7816. Can you explain this please, I am bit confused.
I am trying to understand the answer for this problem:
The current price of a stock is $30. In each of two time steps, where each time step is three months, the stock may go up by 8% or down by 8%. For example, the stock might go up twice in a row to realize a price of $30*1.08*1.08 = $34.99; or the stock might go down twice is a row to realize a price of $30*0.92*0.92 = $25.39. The riskfree rate is 4%. What is the implied noarbitrage price of a European call option with six months to maturity (T =0.5) on the stock with a strike price of $30?
In your solution, you provided 2.7816 as the discounted value of the average weighted from the two step to one step. But, if I see, 4.992 + 0 / 2 = 2.496. If this is discounted to previous stage, it would be 2.496 * e ^ -4% * 1 = 2.3981, but you indicated the value as 2.7816. Can you explain this please, I am bit confused.
