The situation
Spot is ₹100. Next period the stock moves to ₹125 or ₹85. The risk-free growth factor is 1.05 and the strike is ₹100. Assume no dividends.
Your task
Find the one-period call value.
Reveal step-by-step solution
Set up the problem
Risk-neutral up weight = (₹105 − ₹85) ÷ (₹125 − ₹85) = 0.50.
Work through the numbers
The two payoffs are ₹25 and ₹0. Weighted payoff = ₹12.50.
Interpret the result
Value = ₹12.50 ÷ 1.05 ≈ ₹11.90. The weight is for pricing under the stated model.
What to remember
Check that risk-free growth lies between the modeled down and up returns, then discount the weighted payoff.