Pricing the Premiere-Day Call

A film studio premieres a movie tomorrow. Analysts assign a 30% chance it's a blockbuster, in which case the studio's shares will trade at \$100 tomorrow, and a 70% chance it flops, sending shares to \$20. Shares change hands today at \$60, and the overnight risk-free rate is 0%. Someone offers you a contract granting the right — with no obligation — to purchase one share tomorrow at \$50. What is this contract worth today?

Answer

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