Use the Information for the Question(s)below

question 38

Multiple Choice

Use the information for the question(s) below.
The current price of KD Industries stock is $20.In the next year the stock price will either go up by 20% or go down by 20%.KD pays no dividends.The one-year risk-free rate is 5% and will remain constant.
-Using risk-neutral probabilities,the calculated price of a one-year put option on KD stock with a strike price of $20 is closest to:

• A)$2.00.
• B)$2.15.
• C)$1.45.
• D)$2.40.

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Definitions:

Market Liquidity

The extent to which a market allows assets to be bought and sold quickly without affecting the asset's price significantly.

Liquidity Risk

The risk of being unable to quickly convert assets into cash without significant loss in value, affecting a company's or individual's ability to meet short-term obligations.

Hedge Fund Returns

The earnings generated from investments in a hedge fund, which is a pooled investment fund that employs different strategies to earn active returns for its investors.

Pairs Trading

A form of statistical arbitrage in which stocks are paired up based on underlying similarities and long/short positions are established to exploit any relative mispricing between each pair.