A Stock Is Currently Trading At $S _ { 0 } = 26.15$

question 1

Multiple Choice

A stock is currently trading at $S _ { 0 } = 26.15$ .It is not expected to pay dividends over the next year.You price a one-month call option on the stock with a strike of $K = 25$ using the Black-Scholes model and find the following numbers: $$\begin{array} { r l r l } d _ { 1 } & = 0.717 & d _ { 2 } & = 0.645 \\N \left( d _ { 1 } \right) & = 0.763 & N \left( d _ { 2 } \right) & = 0.740\end{array}$$ Given this information,the risk-neutral probability of the call finishing in the money is

• A)71.7%
• B)64.5%
• C)76.3%
• D)74.0%

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Definitions:

Risk Premium

The additional return an investor demands for taking on a higher risk compared to a risk-free asset, indicating the compensation for bearing extra risk.

Principle of Diversification

A risk management strategy that mixes a wide variety of investments within a portfolio to minimize risks.

Efficient Market

A financial market theory stating prices fully reflect all available information, making it impossible to consistently achieve higher returns.

Concentrating Investment

Allocating a significant portion of an investment portfolio to a single investment or a small group of investments, increasing potential risk and return.