Suppose Carol's Stock Price Is Currently $20

question 4

Multiple Choice

Suppose Carol's stock price is currently $20. In the next six months it will either fall to $10 or rise to $40. What is the current value of a six-month call option with an exercise price of $12? The six-month risk-free interest rate is 5 percent per six-month period. (Use the risk-neutral valuation method.)

• A)$9.78
• B)$10.28
• C)$16.88
• D)$13.33

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Definitions:

Conventional

Pertaining to what is considered typical, traditional, or in accordance with established norms and standards.

Postconventional

Referring to the stage of moral development at which an individual's sense of ethics comes from internal beliefs that transcend societal norms and laws.

Intentional

Done on purpose; deliberate.

Threatening

The act of expressing or implying harm to intimidate or coerce someone.