The Price of a European Call Option on a Stock

question 6

Multiple Choice

The price of a European call option on a 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.A dividend of $1 is expected in six months.What is the price of a one-year European put option on the stock with a strike price of $50?

• A) $8.97
• B) $6.97
• C) $3.06
• D) $1.12

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Definitions:

Experimental Hypothesis

An assumption or prediction about the relationship between two variables or the outcome of an experiment designed to be tested through research.

Control Conditions

Conditions in an experiment that are kept constant to accurately test the impact of the experimental factor.

Experimental Procedures

Systematic processes undertaken to discover new knowledge or to test hypotheses by manipulating variables and observing the outcomes.

Correlation Causation

Refers to the logical error of assuming that a correlation between two variables implies that one causes the other.