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  3. a) in your own words define a call option (in gene

a) In your own words define a call option (in general any asset). Describe...

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Finance

a) In your own words define a call option (in general any asset). Describe the payoff for someone who purchased a call option on a stock.

b) A stock is selling for $28 today. In 1 year, be worth either $38 (with 40% probability) or $25 (with 20% probability). If the interest rate is 8%, what is the value today of a one-year call option on the stock with exercise price $30?

Hint: Calculate the state prices qu and qd and then the value of the option (you can use the template I have for you with binomial figure in Excel in the link below).

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