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PLEAASE EMERGENCY !!!! a) In your own words define a call option (in general ...

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Finance

PLEAASE EMERGENCY !!!!

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).

BINOMIAL OPTION PRICING
Up
Down
Initial stock price
Interest rate
Exercise price
Call option
???
State prices
qu
qd
Call price

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