## A share of stock in MagnumOpus, Inc. is $54 per share. It is equally probable that MagnumOpus shares will sell for $50 or $62 per share in 30 days.

A share of stock in MagnumOpus, Inc. is $54 per share. It is equally probable that MagnumOpus shares will sell for $50 or $62 per share in 30 days. a. Suppose that the strike price on a 30-day call option is $55. What is the price of a call option if the cost of borrowing (interest rate) to finance the purchase is zero? b. How is the price of a call option affected if the strike price increases to $56? c. Suppose the strike price is $56. How will the price of a call option be affected if it is equally likely that MagnumOpus shares sell for $48 or $65 in 30 days? d. How is your answer to part c affected if the interest rate is 5 percent? e. Consider the situation in part b. What is the price of the call option if the probability of a low price after 30 days is pL = 0.4 and the probability of a high price after 30 days is pH = 0.6?

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