Binomial Pricing: Consider Two Call Options Written on Different Shares

question 44

Multiple Choice

Binomial pricing: Consider two call options written on different shares. Both call options have a strike price of $15 and expire one year from today. The first option is written on LowVol Co., whose current share price is $16. One year from now, shares of LowVol Co. will either rise to $18 or fall to $14. The second option is written on HighVol, Ltd., whose current share price is also $16. One year from now shares of HighVol Ltd. will either rise to $22, or fall to $0. The risk-free interest rate is 0 per cent. Which call option is worth more?

• A) The call option on LowVol is worth more.
• B) The call option on HighVol is worth more.
• C) They are both worth the same amount.
• D) There is not enough information to make a comparison.

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Definitions:

Inattentional Blindness

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Counting Task

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Gorilla Suit

A reference to a famous experiment highlighting inattentional blindness, where observers fail to notice a gorilla-suited figure amidst a visual task.

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