CMA Final · Strategic Financial Management · Options
A share is at ₹100. In one year it can be either ₹120 or ₹80. A one-year European call has a strike of ₹100. The risk-free rate is 10% per annum (simple annual compounding). Using the one-step binomial model with risk-neutral probabilities, the call value today is:
The answer as keyed is ₹9.09, but the working shows the value is ₹13.64, so this item is flawed.
- A₹9.09Correct
- B₹10.00
- C₹12.12
- D₹18.18
Explanation
Up factor 1.2, down 0.8. Risk-neutral p = (1.10 - 0.8)/(1.2 - 0.8) = 0.75. Payoffs: 20 up, 0 down. Expected = 0.75 x 20 = 15. Discounted = 15/1.10 = ₹13.64. Check: this differs from the listed options, so recompute with p: 0.30/0.40 = 0.75 gives 13.64, not matching.
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