What Is the Call Option Premium Given the Following Information

question 2

Multiple Choice

What is the call option premium given the following information?
$$\begin{array} { l } \text { Stack price }&\$47 \\\text {Strike price } &\$40\\\text { Standard deviation }&44\% \\\text { Risk-free rate } &4\%\\\text { Dividend yield }&0\% \\\text { Time (years) }&.25\end{array}$$

• A)$7.16
• B)$7.78
• C)$8.58
• D)$9.03
• E)$9.49

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Definitions:

Canadian Dollar

The official currency of Canada, represented by the symbol CAD or C$.

Absolute Purchasing Power Parity

The theory that, in the absence of transaction costs and other barriers, identical goods in different countries should have the same price when expressed in a common currency.

Transaction Costs

The expenses incurred when buying or selling goods and services, which may include commissions, fees, and the bid-ask spread.

Covered Interest Arbitrage

An investment strategy that involves exchanging domestic currency for a foreign currency, investing in foreign interest-bearing assets, and using forward contracts to hedge exchange rate risk.