Suppose a Risk-Neutral Power Plant Needs 10,000 Tons of Coal

Multiple Choice

Suppose a risk-neutral power plant needs 10,000 tons of coal for its operations next month. It is uncertain about the future price of coal. Today it sells for $60 a ton but next month it could be $50 or $70 (with equal probability) . How much would the power plant be willing to pay today for an option to buy a ton of coal next month at today's price? (Ignore discounting over the short period of a month.)

A) 5
B) 4
C) 3
D) 0