The value of a one-month call option with an exercise price of $40 is $3.7.
From the information given, the stock price of Heavy Metal (HM) changes only once a month as it goes up by 20% or it falls by 16.7% and the price now is $40.
The value of the call option will be:
= (p × 20) + (1 - p) - 16.7 = 1
where p = 0.48
= (0.48 × 8) + (0.52 × 0) / 1.01
= 3.8
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