A Stock Is Currently Trading at a Price of 22 $C ( 20 ) = 3.25$

question 11

Multiple Choice

A stock is currently trading at a price of 22.You observe the following prices for European call options on the stock (the strikes are in parentheses) : $C ( 20 ) = 3.25$ , $C ( 22 ) = 1.95$ ,and $C ( 24 ) = 0.40$ .You can conclude from this that

• A)The 20-strike call is overvalued.
• B)The 24-strike call is undervalued.
• C)The prices of the calls are inconsistent with no-arbitrage.
• D)The stock is mispriced.

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Definitions:

Fast-Food Chain

A series of restaurants offering quick service and a menu of fast food items, typically operating under the same brand name.

Proposed New Product

A concept or prototype being considered by a company for development and market introduction.

Discount Rate

The interest rate used to discount future cash flows to their present value.

Net Present Value

A financial metric that calculates the value of a series of cash flows by discounting them to their present value, considering the time value of money.