A Binary Option Pays of $100 If a Stock Price

question 3

Multiple Choice

A binary option pays of $100 if a stock price is greater than its current value in three months. The risk-free rate is 3% and the volatility is 40%. Which of the following is its value?

• A) 99.25N(-0.1375)
• B) 99.25N(0.1375)
• C) 99.25N(-0.0625)
• D) 99.25N(0.0625)

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Definitions:

Short-Run Phillips Curve

An economic model illustrating a temporary inverse relationship between the rate of unemployment and the rate of inflation, providing insights into monetary policy's impact.

Volcker Disinflation

A policy period in the early 1980s during which Federal Reserve Chairman Paul Volcker significantly raised interest rates to reduce inflation.

Money Growth

The increase in the amount of money in circulation within an economy, which can influence inflation and economic activity.

Aggregate-Demand Curve

A visual depiction illustrating the connection between the total economy's price level and the aggregate demand for products and services at this specific price point.