You Own One Call Option with an Exercise Price of $55

question 4

Multiple Choice

You own one call option with an exercise price of $55 on Doo Little stock. The stock is currently selling for $55.20 a share but is expected to sell for either $54 or $62 a share in one year. The risk-free rate of return is 3 percent and the inflation rate is 2.5 percent. What is the current option price if the option expires one year from now?

• A) $0.55
• B) $0.79
• C) $1.67
• D) $2.43
• E) $2.72

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