The Price of a Stock,which Pays No Dividends,is $30 and the Strike

question 11

Multiple Choice

The price of a stock,which pays no dividends,is $30 and the strike price of a one year European call option on the stock is $25.The risk-free rate is 4% (continuously compounded) .Which of the following is a lower bound for the option such that there are arbitrage opportunities if the price is below the lower bound and no arbitrage opportunities if it is above the lower bound?

• A) $5.00
• B) $5.98
• C) $4.98
• D) $3.98

Understand how to calculate and compare the interest earned on different investment vehicles over specified periods.

Analyze and construct loan repayment schedules incorporating principal and interest components.

Calculate and analysis investment returns over different periods, including investments in T-bills and commercial paper.

Understand the financial implications of premature settlement proposals on promissory notes and investments.

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Definitions:

Profit Margin

A financial ratio that calculates the amount of net income earned with each dollar of sales by dividing net profit by total revenue.

ROE

Return on Equity, which measures a corporation's financial productivity, is computed by dividing the net income by the total equity of shareholders.

D/E Ratio

The debt-to-equity ratio, a measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity.

Assets

Resources owned by a business or individual that have economic value and can be used to meet debts, commitments, or legacies.