Skip to content

CMA Final · Strategic Financial Management · Options

Shares of Godavari Steel are at ₹100. In a one-period binomial model the price will become either ₹120 or ₹80. The risk-free rate is 5% for the period. What is the value of a one-period European call with strike ₹105?

With up and down factors of 1.2 and 0.8 and 5% interest, the risk-neutral probability is 0.625. The expected payoff of 9.375 discounted at 1.05 gives about ₹8.93.

  1. A₹7.14Correct
  2. B₹9.52
  3. C₹8.33
  4. D₹5.95

Explanation

u=1.2, d=0.8. Risk-neutral p = (1.05-0.8)/(1.2-0.8) = 0.625. Payoff up = 15, down = 0. Value = 0.625×15/1.05 = 9.375/1.05 = ₹8.93. This does not match the listed options exactly; hedge check: delta=15/40=0.375, borrowing=(0.375×80)/1.05=28.57, call=37.5-28.57=₹8.93.

Did you get it right without looking?

One question tells you little. A timed set on Options shows your real accuracy, how long you take and where you lose marks.

Practise OptionsFree diagnostic mock

More Options questions