A Share of Stock Is Currently Priced at $20 and Will

question 42

Multiple Choice

A share of stock is currently priced at $20 and will change with equal likelihood to either $50 or $10.A call option with a $25 exercise price is available on the stock.How many shares of stock must be purchased to replicate the payoff from owning one call option?

• A)$.50 shares
• B)$.75 shares
• C)$.80 shares
• D)$1.25 shares Given the possible range of stock values, the option can range in price from $25 to $0.Then,

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Definitions:

Interdependence

A situation in which two or more entities are dependent on each other for resources, information, or transactions.

Rivals

Competitors who are in direct competition with one another, vying for the same market share or resources.

Interdependent

A situation where the outcomes or decisions of two or more entities are dependent on each other.

Oligopoly

A market structure characterized by a small number of firms dominating the market, leading to limited competition.