Assume that a share with a price of 100 dollar today will be worth either120...
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Accounting
Assume that a share with a price of 100 dollar today will be worth either120 dollar or 80 dollar in a year with an unknown probability for each outcome. Assume that the risk-free interest rate is 4%. Draw the payment on the closing day of a held call option with an exercise price of 100 dollar as a function of the share price and calculate the value of the call option today. (Tip: try to replicate the option's payment on the due date using a position in 0.5 shares and a certain amount B as a bank loan.)
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