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Binomial option pricing model and risk-neutral probability

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Consider the following. Microsoft Corp. (MSFT) stock is currently trading at $60 a share. You wish to purchase a call option on the stock, as you feel MSFT is underpriced and should increase in value. You note that the three-month treasury yield is .75%. You do not expect short-term interest rates to move significantly over the year. You expect MSFT to increase in value at a rate of 4% per quarter. Using the binomial option pricing model and risk-neutral probability, what do you estimate the price of a call should be if it expires in six-months (two time periods)? What should the price of the call be if it expires in nine-months (three time periods)? It is important to show all work for this question to receive full credit.

Reference no: EM131317174

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