The price of an asset can move to only two values – USD 102 and USD 98 – over the next month. The probability of a price rise is 99%, while the probability of a fall is 1%. The annual simple risk-free interest rate is 12%. What is the value of a one-month call option, on one unit of the asset, struck at USD 100?
According to me fair price is 0.99*(102-(100/1.01)) which is around 2.7. But the correct answer is from one of the options 1.96 or 2.2. What am I doing wrong ?