The Current Price of a Stock Is 40

question 2

Multiple Choice

The current price of a stock is 40.After one period,it will be worth either 41.80 or 38.20 with probabilities 0.60 and 0.40,respectively.The risk-free rate of interest over this period,in gross terms,is 1.05 (i.e. ,a dollar invested at the beginning of the period returns 1.05 at the end of the period) .The no-arbitrage value of a one-period call option on this stock with a strike of 40

• A)is approximately 1.03.
• B)is approximately 1.81.
• C)can be anything between 0 and 1.80.
• D)does not exist in the given setting.

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Definitions:

Degrees of Freedom

The number of values in the final calculation of a statistic that are free to vary, often associated with the sample size.

Two-way ANOVA

A statistical test used to determine the effect of two independent variables on a dependent variable.

Factor A

A specific variable or element considered in an experimental design or analysis, often denoted as a primary independent variable.

Interaction

In statistics and research, the phenomenon where the effect of one variable on an outcome is modified by the level or presence of another variable.