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The shares of XYZ Inc. are currently selling for $120 per share. The shares are expected...

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Finance

The shares of XYZ Inc. are currently selling for $120 per share.The shares are expected to go up by 10 percent or down by 5 percentin each of the following two months (Month 1 and Month 2). XYZ Inc.is also expected to pay a dividend yield of 2 percent at the end ofMonth 1. The risk-free rate is 0.5 percent per month.

  1. What is the value of an American call option on XYZ shares,with an exercise price of $125 and two months to expiration? Usethe binomial model to obtain the answer.

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SOLUTIONGiven dataThe shares of XYZ Inc are    See Answer
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The shares of XYZ Inc. are currently selling for $120 per share.The shares are expected to go up by 10 percent or down by 5 percentin each of the following two months (Month 1 and Month 2). XYZ Inc.is also expected to pay a dividend yield of 2 percent at the end ofMonth 1. The risk-free rate is 0.5 percent per month.What is the value of an American call option on XYZ shares,with an exercise price of $125 and two months to expiration? Usethe binomial model to obtain the answer.

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