John wants to buy a European call option on Company B, a non-dividend-paying stock, with...
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John wants to buy a European call option on Company B, a non-dividend-paying stock, with an exercise price of $40, and six months to maturity. The current stock price is at $30, and is expected to either rise to $60 or fall to $15 in 6 months. The risk-free interest rate is 21% per year. a) Use the risk-neutral approach, compute the value of the call option. (6 points)
b) Compute the value of a put option with similar terms. (4 points)
c) Briefly explain the key determinants of a call option and how each of the determinants is related with the price of a call. (5 points)
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