Consider a stock with a current price of P = $27.Suppose that over the next 6 months the stockprice will either go up by a factor of 1.41 or downby a factor of 0.71. Consider a call option on thestock with a strike price of $25 that expires in6 months. The risk-free rate is 6%.(1) Using the binomial model, what are the endingvalues of the stock price? What are the payoffsof the call option?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Consider a stock with a current price of P = $27.
Suppose that over the next 6 months the stock
price will either go up by a factor of 1.41 or down
by a factor of 0.71. Consider a call option on the
stock with a strike price of $25 that expires in
6 months. The risk-free rate is 6%.
(1) Using the binomial model, what are the ending
values of the stock price? What are the payoffs
of the call option?

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