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

question 92

Multiple Choice

A share of stock is currently priced at $20 and will change with equal likelihood to either $40 or $10.A call option with a $20 exercise price is available on the stock.The interest rate is zero.Which of the following positions will provide (approximately) the same payoffs as the option?

• A) Buy 0.667 shares and lend $6.67
• B) Buy 0.667 shares and borrow $6.67
• C) Buy 0.5 shares
• D) Sell 0.667 shares and borrow $0.667

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Definitions:

Long-Term Debt Ratio

A financial ratio that shows the proportion of a company's long-term debt relative to its total capital.

Debt Holders

Individuals or entities that have invested by lending money to another party, expecting repayment plus interest.

Shareholders

Individuals or entities that own one or more shares of stock in a corporation, making them partial owners of the company.

Receivables Turnover

A financial metric indicating how often a company collects its average accounts receivable within a certain period, measuring the efficiency of credit sales collection.