A Stock Has a Current Price of $100

question 12

Multiple Choice

A stock has a current price of $100.Assume a CRR-style jump-to-default model in which the volatility is 30%.Let the risk-neutral probability of default in three months be 10%.The 3-month risk-free rate is 2% in continuously-componded and annualized terms.What is the price of a three-month at-the-money put option on this stock in a one-period jump-to-default tree model?

• A)$7.22
• B)7.72
• C)$11.82
• D)$13.42

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Definitions:

Contribution Margin Ratio

A ratio that represents the percentage of sales revenue that exceeds variable costs, indicating how much revenue contributes towards covering fixed costs and generating profit.

Break-even Point

The sales level at which total revenues equal total costs, resulting in no profit or loss.

Margin of Safety

This metric calculates how much sales can decline before a business reaches its breakeven point.

Total Contribution Margin

The total amount remaining from sales revenue after all variable costs are deducted, used to cover fixed costs and profit.