A Stock Is Currently Trading at $100 $u = 1.05$ Or Fall by a Factor Of

question 24

Multiple Choice

A stock is currently trading at $100.In each period of a binomial tree,the stock will either increase in price by a factor of $u = 1.05$ or fall by a factor of $d = 0.90$ .The risk-free rate per period of the binomial tree is 0.1668%,i.e. ,an investment of a dollar at the risk-free rate returns $1.001668 after one period.What is the risk-neutral probability of the stock finishing in the money on a 100-strike,two-month call option?

• A)0.46
• B)0.50
• C)0.89
• D)0.90

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Definitions:

Store Of Value

An asset that can be saved, retrieved, and exchanged in the future without significantly losing value.

Currency

The system of money in common use in a country, which facilitates the exchange of goods and services.

Liquid Asset

An asset that can easily be converted into cash in a short period without losing value.

Function Of Money

Refers to the main roles of money in an economy, which include being a medium of exchange, a unit of account, a store of value, and sometimes, a standard of deferred payment.