Suppose Carol's Stock Price Is Currently $20

Multiple Choice

Suppose Carol's stock price is currently $20. In the next six months it will either fall to $10 or rise to $40. What is the current value of a six-month call option with an exercise price of $12? The six-month risk-free interest rate is 5 percent per six-month period. (Use the risk-neutral valuation method.)

A) $9.78
B) $10.28
C) $16.88
D) $13.33