Challenge The BINOM is particularly useful for thinking thro…
Challenge The BINOM is particularly useful for thinking through and pricing a new, exotic option. Use a two-step BINOM to price the following digital option. Digital options always pay off $1 if they finish in-the-money (regardless of depth) and $0 if it finishes at- or out-of-the-money. Price the following two-month, European-style digital call option on ABC Corp. stock with a strike price of $. The spot price of ABC’s stock is $. The volatility of its returns corresponds to monthly u and d parameters of and 1/, respectively. The gross monthly risk-free rate is . Enter your answer as a number of dollars, rounded to the nearest $0.01. Hint: Use the same three-step process as usual.