A Stock Is Currently Trading at $100 $u = 1.10$ Or Fall by a Factor Of

question 1

Multiple Choice

A stock is currently trading at $100.In each month,the stock will either increase in price by a factor of $u = 1.10$ or fall by a factor of $d = 0.90$ .The risk-free rate of interest per month is 0.1668% in simple terms,i.e. ,an investment of $1 at the risk-free rate returns $1.001668 after one month.If there are no dividends,what is the early-exercise premium of a 100-strike,six-month American call option?

• A)$0
• B)$0.15
• C)$0.25
• D)$0.50

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Definitions:

Efficient Markets Hypothesis

A financial theory stating that asset prices fully reflect all available information.

Overvalued

A term used to describe a situation in which a security or asset is trading at a price that exceeds its intrinsic value.

Undervalued

A description of an asset or currency whose price is believed to be lower than its intrinsic value.

Mutual Fund Managers

Professionals responsible for managing the investment portfolio of a mutual fund, making decisions about which securities to buy, hold, or sell.