You Own One Call Option with an Exercise Price of $40

question 44

Multiple Choice

You own one call option with an exercise price of $40 on Northwest Exporters stock. This stock is currently selling for $37.90 a share but is expected to increase to either $38 or $43 a share over
The next year. The risk-free rate of return is 4 percent and the inflation rate is 3.5 percent. What is
The current value of your option if it expires in one year?

• A) $.41
• B) $.82
• C) $1.67
• D) $2.10
• E) $5.00

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Definitions:

Candle Flame

The visible, luminous part of a candle that produces light and heat from the combustion of the candle’s fuel.

Absolute Threshold

The minimum intensity of a stimulus that one can detect 50% of the time.

Psychophysical Threshold

The minimum level of stimulus intensity needed for detection by sensory systems.

Subliminal Stimuli

Stimuli that are below the threshold of conscious perception, often used in reference to messages that are not consciously detected but can impact behavior.