A Futures Price Is Currently 40 Cents

question 8

Multiple Choice

A futures price is currently 40 cents.It is expected to move up to 44 cents or down to 34 cents in the next six months.The risk-free interest rate is 6%.What is the value of a six month call option with a strike price of 39 cents?

• A) 5.00 cents
• B) 2.91 cents
• C) 3.00 cents
• D) 4.21 cents

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Definitions:

Economic Cost

A payment that must be made to obtain and retain the services of a resource; the income a firm must provide to a resource supplier to attract the resource away from an alternative use; equal to the quantity of other products that cannot be produced when resources are instead used to make a particular product.

Average Total Cost

The total cost of production divided by the quantity produced, representing the cost per unit of output.

Average Total Costs

A rephrasing: The sum of all production costs divided by the quantity of goods produced, indicating the average cost for each unit.

Average Variable Costs

This represents the total variable costs (costs that vary with the production level) divided by the quantity of output produced.