Suppose Carol's Stock Price Is Currently $20

question 7

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 $15? The six-month risk-free interest rate is 5 percent per six-month period. (Use the replicating portfolio method.)

• A)$8.73
• B)$10.28
• C)$16.88
• D)$13.33

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Definitions:

Foreign Demand

The desire and willingness of buyers in other countries to purchase goods and services from a particular country.

Consumer Surplus

The difference in the total funds consumers are prepared to allocate for a good or service against the total funds they genuinely allocate.

Consumer Surplus

The contrast in the total money consumers are willing to shell out for a good or service versus what they truly pay.

Speculative Demand

Demand driven not by the direct benefits one obtains from owning or consuming a good but instead by an expectation that the price of the good will increase.