The Underlying Stock for a European Exchange Option Has S

question 7

Multiple Choice

The underlying stock for a European exchange option has S = $27.15,div = 2.0%,and ?σ = 0.18.The strike stock has S = $30.00,div = 0.0%,and σ = 0.22.The two stocks have a correlation coefficient of 0.73.If the exchange option expires in 2 years,what is the price of the call using a Black-Scholes approach?

• A) $0.88
• B) $0.98
• C) $1.09
• D) $1.19

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Definitions:

Contribution Margin Ratio

The percentage of sales revenue that exceeds variable costs, indicating how much revenue contributes to covering fixed costs and generating profit.

Mixed Costs

Expenses that have both fixed and variable components, changing with the level of production but also incurring a base cost.

CVP Analysis

Cost-Volume-Profit Analysis, an accounting tool used to determine how changes in costs and volume affect a company's operating income and net income.

Variable

In finance and economics, a variable represents a quantity or factor that can change and influence outcomes, such as price, interest rates, or investments.