The Current Price of a Non-Dividend Paying Stock Is $30

question 7

Multiple Choice

The current price of a non-dividend paying stock is $30. Use a two-step tree to value a European put option on the stock with a strike price of $32 that expires in 6 months. Each step is 3 months, the risk free rate is 8%, and u = 1.1 and d = 0.9.

• A) $2.24
• B) $2.44
• C) $2.64
• D) $2.84

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Definitions:

Ecological Validity

The extent to which the findings of research studies can be generalized to real-life settings.

Reinforcement

In behavioral psychology, a consequence applied that strengthens the likelihood of the behavior being repeated.

Noam Chomsky

An influential linguist and cognitive scientist known for his theories on generative grammar and criticism of behaviorism.

Grammar

A system of rules that produces well-formed, or “legal,” entities such as sentences of a language.