Exhibit 22.5 Use the Information Below for the Following Problem(S)

question 46

Multiple Choice

Exhibit 22.5
Use the Information Below for the Following Problem(S)
The information provided is relevant in the context of a one period (one year) binomial option pricing model. A stock currently trades at $50 per share, a call option on the stock has an exercise price of $45. The stock is equally likely to rise by 25% or fall by 25%. The one-year risk free rate is 2%.
-Refer to Exhibit 22.5.Estimate n,the number of call options that must be written.

• A) -1.4286
• B) -2.9286
• C) -2.8571
• D) -2.5714
• E) -1.1111

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Definitions:

Adjusted Cost

A value that has been modified from its original cost to reflect changes due to various factors, such as depreciation or amortization.

Income Statement

A report showcasing a business's fiscal results during a particular accounting cycle, which includes information on income, costs, and profit.

Manufacturing Overhead

All indirect costs associated with manufacturing, such as utilities, maintenance, and factory management salaries, not directly tied to producing a specific product.

Opportunity Costs

The cost of foregoing the next best alternative when making a decision or choosing an option.