In a One-Period Binomial Model,assume That the Current Stock Price

question 8

Multiple Choice

In a one-period binomial model,assume that the current stock price is $100,and that it will rise to $110 or fall to $90 after one month.The risk-free gross return per time step is 1.001668.If a 98-strike call option is trading at $2,how much arbitrage profit can you make in present value terms?

• A)$2.09
• B)$4.09
• C)$6.09
• D)$12.09

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Definitions:

Arbitrator

An independent individual or body officially appointed to settle a dispute, often used in the context of labor relations and commercial contracts.

Binding Decision

A final and enforceable ruling or judgment made by an authority that must be followed.

Neutral Third Party

An impartial entity involved in a dispute or negotiation to facilitate a resolution or agreement without any bias towards the parties involved.

Bargaining Zone

The range within which an agreement is satisfactory to both parties involved in a negotiation process.