Pricing the Tail You Cannot See
A stock settles on one of four branches:
| branch | probability | settlement value |
|---|---|---|
| acquisition, outcome A | 0.50 x 0.70 | 20 dollars |
| acquisition, outcome B | 0.50 x 0.30 | dollars, unknown |
| no acquisition, good | 0.50 x 0.80 | 5 dollars |
| no acquisition, bad | 0.50 x 0.20 | 0 dollars |
An analyst who knows all four probabilities values the stock at 15 dollars. A call option pays at settlement, where is the realised value. Price the call at its expected payoff.
Answer format: round to 2 decimal places.
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