You Enter into an Exchange Option Contract Where You Have $- 30$

question 1

Multiple Choice

You enter into an exchange option contract where you have the right to give up 5 shares of IBM stock in exchange for one share of Google in three months.After three months,IBM is trading at $92 per share while Google is at $430.The payoff at maturity is

• A) \(- 30\)
• )
• B)Zero.
• C) \(+ 6\)
• )
• D) \(+ 30\)
• )

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Definitions:

Nominal Interest Rate

The named or quoted rate usually stated on an annually compounded basis. May be different from the effective rate due to non-annual compounding.

Real Interest Rate

The interest rate adjusted for inflation, reflecting the true cost of borrowing or real yield on an investment.

Inflation Premium

The additional interest rate that lenders demand to compensate for the loss of purchasing power of money due to inflation.

Yield Curve

The relationship between interest rates and the term of debt, generally expressed graphically. A normal yield curve is upsloping, reflecting rates that increase with increasing term. An inverted curve is downsloping.