19.12.1 The current price of a stock is $10, and it is known that at the end of three (3) months the stock's price will be either $13 or $7. The risk-free rate is 4% per annum. What is the implied no-arbitrage price of a three-month (T = 0.25) European call option on the stock with a strike price of $10? (note: this does not include an assumption about the stock's volatility).
a) $0.97
b) $1.28
c) $1.53
d) $1.55
Hi for the above problem from the study notes, I am more comfortable using the probability approach described in the notes, so I solved the above problem in the following way and wind up with $1.55 as the answer instead of $1.53. Can you tell me what I am doing wrong? My steps are shown below.
13p + 7(1-p) + 10*e^0.04(0.25)
6p = 10*e^0.04(0.25)-7
p = 0.5168
3*0.5168+0*0.4832 = 1.55
a) $0.97
b) $1.28
c) $1.53
d) $1.55
Hi for the above problem from the study notes, I am more comfortable using the probability approach described in the notes, so I solved the above problem in the following way and wind up with $1.55 as the answer instead of $1.53. Can you tell me what I am doing wrong? My steps are shown below.
13p + 7(1-p) + 10*e^0.04(0.25)
6p = 10*e^0.04(0.25)-7
p = 0.5168
3*0.5168+0*0.4832 = 1.55
