Answer:
The value of each call option is $1.6.
Explanation:
The formula for the risk-neutral probability of an up movement is
p = [tex]\frac{e^{rT} -d }{u - d}[/tex]
u = 36 / 30 = 1.2
d = 26 / 30 = 0.8667
r = 0
T = 0.5
The formula gives :
p= (1-0.8667) / (1.2-0.8667) =0.4.
The payoff from the call option is $4 for an upward movement and $0 for a downward movement.
The value of the option
=0.4×4 +0.6×0 = $1.6
