Two Stocks a and B Both Have a Current Price

question 4

Multiple Choice

Two stocks A and B both have a current price of $100 and are identical in every way except that the risk-neutral probability of default of A in three months is 10%,and that of B is zero.Assume a CRR-style jump-to-default model in which the volatility of both stocks is 30%.The risk-free rate is 2%.Consider the price of three-month at-the-money call options on these two stocks in a one-period jump-to-default tree model.Which of the following statements is valid?

• A)The call option on A is worth less than the call option on B.
• B)The call option on A is worth the same as the call option on b.
• C)The call option on A is worth more than the call option on B.
• D)There is insufficient information to determine which option is worth more.

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Definitions:

Right Hand

Typically refers to the dominant hand of most individuals, associated with fine motor skills and often contrasted with left-hand capabilities.

Partition

A partition refers to dividing something into parts or sections, often used in the context of data storage or dividing spaces.

Visual Acuity

The clarity or sharpness of vision, a measure of the eye's ability to distinguish shapes and details.

Snellen Chart

A chart used to measure visual acuity, commonly seen in eye doctors' offices, featuring rows of letters decreasing in size.