A Stock Is Trading at 100 $u = 1.20$ And $d = 0.80$

question 39

Multiple Choice

A stock is trading at 100.Consider a two-period binomial model in which the stock price moves up or down each period by factors $u = 1.20$ and $d = 0.80$ ,respectively.The gross risk-free rate of interest per time step is 1.04.You are long a cash-or-nothing digital call option that pays $100 if $S _ { T } \geq 100$ ,and nothing otherwise;and short a cash-or-nothing digital put option that pays $100 if $S _ { T } \leq 100$ ,and nothing otherwise.(Here, $S _ { T }$ is the stock price at the end of two periods. ) The value of your portfolio is

• A)Positive.
• B)zero.
• C)Negative.
• D)Cannot be calculated from the given information.

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Definitions:

Perfectly Inelastic

Describes a situation where the demand for a good does not change in response to a change in price.

Price Elasticity

A measure of how much the quantity demanded of a good responds to a change in the price of that good, defined as the percentage change in quantity demanded divided by the percentage change in price.

Demand Curve

A diagram displaying the connection between a product or service's price and the amount requested over a specified timeframe.

Price Elasticity

A gauge of the responsiveness of the amount of a product desired to alterations in its cost, reflecting demand's sensitivity to changes in price.