suppose a stock worth $50 today is equally likely to be worth $100 or $25 a year from today. What is a fair price to pay today for the option to buy this stock a year from now?

Economics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN:9781305506725
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Chapter24: Price-searcher Markets With High Entry Barriers
Section: Chapter Questions
Problem 12CQ
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suppose a stock worth $50 today is equally likely to
be worth $100 or $25 a year from today. What is a
fair price to pay today for the option to buy this
stock a year from now?
Transcribed Image Text:suppose a stock worth $50 today is equally likely to be worth $100 or $25 a year from today. What is a fair price to pay today for the option to buy this stock a year from now?
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