# Question: stock x currently sells for 120 after one year its...

###### Question details

Stock X currently sells for $120. After one year, its price will either increase by10% or fall by 10%. The annual risk-free interest rate is 5%.

a) Calculate the current value of an at-the-money **European call option** on stock X maturing in one year.

b) Now assume that the volatility of Stock X increases so that if the stock price increases, it will still increase by 10% but if it falls, it will fall by more than 10%. Everything else stays the same. Show mathematically that the current value of the call option is higher than the value you calculated in part (a).

Please help, I am unable to understand the question nor answer it :(