Suppose Caroll's Stock Price Is Currently $20

question 64

Multiple Choice

Suppose Caroll's stock price is currently $20. In the each next six month periods it will either fall by 50% or rise by 100%. What is the current value of a one-year call option with an exercise price of $15? The six-month risk-free interest rate (periodic rate) is 5%. [Use the two stage binomial method]

• A) $8.73
• B) $10.03
• C) $16.88
• D) $13.33

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Definitions:

Regular Retirement Plan

A retirement savings plan that allows individuals to save and invest for retirement, typically with tax advantages or benefits.

Tax Rate

The percentage at which income or financial transactions are taxed by the government.

Total Savings

The sum of all savings held by an individual or institution, often including bank accounts, investments, and other forms of financial reserves.

Annual Return

The percentage change in value of an investment over a one-year period, accounting for any dividends or interest earned.