Using the Binomial Model, What Is the Value of a Three

question 50

Multiple Choice

Using the binomial model, what is the value of a three month option given the following data and assuming there are no time periods other than three months? The exercise price is
$40; stock price is $46; the upside price is $48; the downside price is $34; the 3 month interest rate is 2%. The upside and down side have equal probabilities.

• A) $3.92
• B) $4.00
• C) $5.88
• D) $6.00

---

Definitions:

Avoidance

Avoidance is a strategy or behavior aimed at sidestepping or evading certain situations, conflicts, or responsibilities.

Strategy

An approach devised for the purpose of achieving a long-term or primary aim.

Tactics

Carefully planned strategies or maneuvers intended to achieve a specific end, often used in contexts of negotiation, conflict resolution, or competitive situations.

Strategy

A comprehensive plan or set of actions designed to achieve specific goals.