The Price of a European Call Option on a Non-Dividend-Paying

question 8

Multiple Choice

The price of a European call option on a non-dividend-paying stock with a strike price of $50 is $6.The stock price is $51,the continuously compounded risk-free rate (all maturities) is 6% and the time to maturity is one year.What is the price of a one-year European put option on the stock with a strike price of $50?

• A) $9.91
• B) $7.00
• C) $6.00
• D) $2.09

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Definitions:

Cash Dividend

A distribution of earnings made by a company to its stockholders, often in the form of profits.

Stock Split

A corporate action that increases the number of shares by dividing each share, which typically reduces the price per share.

Retained Earnings

The portion of a company's profits that are kept or retained and not paid out as dividends to shareholders, often used for reinvestment in the business.

Legal Capital Approach

Method of preparing Paid-In Capital by listing the legal section first.