Suppose a security has a current price of 1500 and investor, Ask an Expert

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Suppose a security has a current price of $15.00, and Investor A expects the security price to increase by 10% in one year with 60% probability or decrease by 5% in one year with 40% probability Investor B agrees with Investor A's values of the future prices but feels that the likelihood of either future price occurring is 50%. Assuming a 3% annual risk-free rate, what is the price of a one-year call option that has a strike price of $15.00 (assuming the call can only be exercised at maturity) for each of these investors? Do the differing probabilities assigned by these investors affect the price of the call option?

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Financial Management, Finance

Category:- Financial Management
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