Consider a One-Period Binomial Model of 6 Months

question 2

Multiple Choice

Consider a one-period binomial model of 6 months.Assume the stock price is $45.00,σ = 0.20,r = 0.06 and the stock's expected return is 12.0%.What is the discount rate for a $45.00 strike European call option (Y) ?

• A) 38.2%
• B) 39.1%
• C) 42.5%
• D) 45.6%

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Definitions:

Two-World Assumption

The belief in a distinct separation between the tangible, empirical world and an intangible, often spiritual or theoretical world.

Skepticism

The philosophical belief that knowledge is not possible, that doubt will not be overcome by any valid arguments. A philosopher who holds this belief is called a skeptic. Skepticism is not merely personal doubt but also requires systematic doubt, with reasons for that doubt.

Rationalists

Philosophers who believe that reason is the chief source and test of knowledge, as opposed to experience or sensory perception.

Contingently False

A proposition that is not necessarily false but can be false under certain conditions or circumstances.