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:

Future Value

The value of an investment or loan at a specific future date, considering interest or return earned over time.

Compound Interest

Interest calculated on the initial principal, which also includes all of the accumulated interest from previous periods on a deposit or loan.

Future Value

The estimated value of an investment at a specific date in the future, considering interest or growth over time.

Compounded Semiannually

Refers to the process where interest is calculated and added to the principal amount of an investment or loan twice a year.