A Call Option Matures in Six Months

question 3

Multiple Choice

A call option matures in six months. The underlying stock price is $37 and the stock's return has a standard deviation of 27 percent per year. The annual risk-free rate is 3.4 percent, compounded continuously. The exercise price is $0. What is the price of the call option?

• A) $39.65
• B) $32.14
• C) $36.37
• D) $32.23
• E) $37.00

Comprehend how economic announcements influence expected returns and the importance of surprise elements.

Understand the role of variance and standard deviation in measuring the dispersion of returns for investments.

Recognize the factors influencing the expected return of a portfolio, including weights based on probability, investment amount, and systematic risk.

Realize the potential to manage and manipulate portfolio risk through investment in diverse securities including international exposure.

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Definitions:

Cultural Context

The environment and situational factors that influence the meanings of actions, symbols, and expressions in a given culture.

Liquid

A state of matter characterized by the ability to flow and take the shape of the container it occupies, lacking a fixed shape but having a defined volume.

Pourable

Having a consistency or thickness that allows a substance to flow or be poured easily.

Baillargeon

A psychologist known for her work in the field of developmental psychology, particularly in infants' understanding of the physical world.