A Share of Stock Is Currently Priced at $20 and Will

question 57

Multiple Choice

A share of stock is currently priced at $20 and will change with equal likelihood to either $55 or $15. A call option with a $25 exercise price is available on the stock. You want to borrow funds to purchase the stock in order to replicate the call option. How many shares of stock must be purchased to replicate one call option?

• A) 1.33 shares
• B) 0.75 share
• C) 0.80 share
• D)1.25 shares

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Definitions:

Dimethylheptanoic Acid

denotes a hypothetical organic compound, potentially misnamed, suggesting a heptanoic acid derivative substituted with two methyl groups.

γ-hydroxypentanoic Acid

An organic compound characterized by a five-carbon chain with a hydroxyl group attached to the third carbon and a carboxylic acid group at the end.

γ-hydroxy-γ-methylbutyric Acid

An organic compound, structurally related to β-hydroxy-β-methylbutyrate (HMB), and is involved in the biosynthesis and metabolism of fatty acids.

δ-hydroxyvaleric Acid

An organic compound that is structurally a hydroxylated form of valeric (pentanoic) acid, where the hydroxyl group is on the δ-carbon.