Answer: 11.59
Explanation:
From the question, we are told that the stock price a year from now will be either $130 or $90 with equal probabilities. This means that the prices have a 50% chance of occuring.
Therefore, the value of a call option with an exercise price of $110 and an expiration date 1 year from now should be worth:
= 0.5[(105 - (90/1+0.10)]
= 0.5(105 - 81.82)
= 0.5(23.18)
= 11.59
