uppose Carol's stock price is currently $20. If the standard deviation of the continuously  compounded returns (σ) on a stock is 60 percent per year. The annual risk-free rate is 12%,  compounded every 6 months.  A. Using one-step binomial tree, what is the current value of a six-month call option with an  exercise price of $25? B. Using two-step binomial tree, what is the current value of a one-year put option with an  exercise price of $25?

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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 Suppose Carol's stock price is currently $20. If the standard deviation of the continuously 
compounded returns (σ) on a stock is 60 percent per year. The annual risk-free rate is 12%, 
compounded every 6 months. 
A. Using one-step binomial tree, what is the current value of a six-month call option with an 
exercise price of $25?
B. Using two-step binomial tree, what is the current value of a one-year put option with an 
exercise price of $25?

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