The Price of a Stock Is Currently $38

question 5

Multiple Choice

The price of a stock is currently $38. Over the course of the next year, the price is anticipated to rise to $41 or decline to $36. If the upside has a 65% probability of occurring and the risk free interest rate is 3%, what is the price of a six month call option with an exercise price of $35 using the binomial model?

• A) $3.89
• B) $4.18
• C) $4.25
• D) $4.70

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Definitions:

Enterprise Managers

Individuals responsible for planning, directing, and overseeing the operations and fiscal health of a business unit, division, department, or an operating unit within an organization.

Innovation

The introduction of new products, ideas, or processes that improve methods or bring novel solutions to the market.

Soviet Union

A former socialist state in eastern Europe and northern Asia, existing from 1922 to 1991.

Invisible Hand

A term coined by Adam Smith to describe the self-regulating behavior of the marketplace, where individual self-interests inadvertently contribute to the economy's overall health.