One Year from Now, a Stock Is Expected to Be

question 215

Multiple Choice

One year from now, a stock is expected to be priced at either $36 or $49. Currently the stock is selling for $38.20 while Treasury bills are yielding 2.5%. What is the value of a twelve-month call option with an exercise price of $40?

• A) $0
• B) $1.44
• C) $2.13
• D) $3.08
• E) $4.45

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Definitions:

Standard Normal Random Variable

A random variable with a mean of 0 and a standard deviation of 1, following a normal distribution.

Area

The measure of the extent of a two-dimensional figure or shape in a plane.

z

In statistics, a z-score indicates how many standard deviations an element is from the mean.

Normally Distributed Random Variable

A type of random variable whose values are symmetrically distributed around the mean, forming a bell-shaped curve when graphed.