CMA Final · Strategic Financial Management · Options
In a one-period binomial model, the share of Godavari Foods is ₹200 and may move to ₹240 or ₹160 at the end of the period. A European call has strike ₹210. The risk-free rate for the period is 5%. Using risk-neutral probabilities, what is the call value today?
The call is worth ₹17.86 by risk-neutral valuation.
- A₹14.29Correct
- B₹12.50
- C₹15.00
- D₹30.00
Explanation
Up factor 1.2, down 0.8. p = (1.05 - 0.8)/(1.2 - 0.8) = 0.625. Call payoff up = 30, down = 0. Value = 0.625 x 30 / 1.05 = 18.75/1.05 = ₹17.86. Rechecking via hedge ratio: delta = 30/80 = 0.375; portfolio 0.375 x 200 - C = PV of 0.375 x 160 = 60/1.05 = 57.14; 75 - 57.14 = 17.86. So the correct figure is 17.86, which is not among the options.
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