Suppose an investor has the opportunity to buy the followingcontract, a call option, on March 1. The contract allows him to buy100 shares of ABC stock at the end of March, April or May at aguaranteed price of $50 per share. He can exercise this option atmost once. For example, if he purchases the stock at the end ofMarch, he can’t purchase more in April or May at the guaranteedprice. The current price of the stock is $50. Each month, assumethat the stock price either goes up by a dollar (with probability0.55) or down by a dollar (with probability 0.45).
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