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Assume risk-neutrality. A European call option with a strike price of $20.40 which expires in...

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Finance

Assume risk-neutrality. A European call option with a strike price of $20.40 which expires in five months is written over a stock that is currently priced at $20.00. It is known that at the end of four months the stock will be either worth $17 or $23. The risk-free interest rate is 4% p.a. (continuously compounded).

i) Verify that the probability of a share price increase is 0.556.

ii) Use the risk-neutral valuation method to determine the value of the call option.

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