Consider a Three-Period Binomial Model of 12 Months

question 15

Multiple Choice

Consider a three-period binomial model of 12 months.Assume the stock price is $37.50,σ = 0.20,r = 0.05 and the exercise price of a call option is $35.What is the forecasted price of the stock at the node after two consecutive upward movements of the stock price?

• A) $38.68
• B) $42.80
• C) $48.84
• D) $50.06

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Definitions:

Contribution Margin

The difference between sales revenue and variable costs, indicating how much revenue contributes to covering fixed costs and generating profit.

Fixed Costs

Costs that do not vary with production or sales levels, including rent, insurance, and salaries, which remain constant regardless of business activity levels.

Operating Income

The profit realized from a business's operations, calculated by subtracting operating expenses from gross profit.

Fixed Costs

Expenses that do not change in proportion to the activity of a business, such as rent, salaries, and insurance premiums.