The Current Price of a Non-Dividend-Paying Stock Is $40

question 2

Multiple Choice

The current price of a non-dividend-paying stock is $40.Over the next year it is expected to rise to $42 or fall to $37.An investor buys put options with a strike price of $41.What is the value of each option? The risk-free interest rate is 2% per annum with continuous compounding.

• A) $3.93
• B) $2.93
• C) $1.93
• D) $0.93

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Definitions:

Straight-Line Depreciation

A method of calculating depreciation by evenly allocating the cost of an asset over its useful life.

Simple Rate of Return

A method to determine the efficiency of an investment, calculated by dividing the annual incremental net operating income by the initial investment's cost.

Investment Project

A project involving the allocation of resources with the expectation of future returns, such as profits or benefits.

Discount Factor(s)

Multipliers used in discounted cash flow (DCF) analyses to convert future cash flows into their present value, reflecting the time value of money.