Would someone please explain to me the calculations to answer question 43 on the CFAI mock exam PM? The explanation provided confuses me - I am unsure how they calculate the call at time 1 as 102.0816, and then at time 0. The hedge ratio math makes sense, the actual option price does not.
S++ = 952.2 X = 750; c++ = Max(S-X,0) = 952.2 - 750 = 202.2
S± = 745.2 X = 750; c± = Max(S-X,0) = 0
So:
c+ = [(π * c++) + [ (1-π) * c±] ]/1.03
The call option value at node up is the risk neutral probability weighted discounted option value from node up up and node up down. As the call option value at node up down is 0, the value is basically call option value at node up up times risk neutral probability and discounted for one period.
Thank you, Shark!