You Currently Own a One-Year Call Option on Rail Company,Inc

question 11

Multiple Choice

You currently own a one-year call option on Rail Company,Inc.,stock.The current stock price is $52.75 and the risk-free rate of return is 4.25 percent.Your option has a strike price of $50 and you assume the option will finish in the money.What is the current value of your call option?

• A)$1.20
• B)$2.59
• C)$4.79
• D)$5.13
• E)$7.27

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Definitions:

Compound Interest

Interest calculated on the initial principal of a deposit or loan, as well as on the accumulated interest of previous periods, leading to exponential growth of the amount over time.

Economic Resource

Assets, materials, and inputs used to produce goods and services, including labor, capital, land, and entrepreneurship.

Money

A medium of exchange that is widely accepted in transactions for goods and services and repayment of debts.

Uninsurable Risk

A risk that cannot be covered by an insurance policy due to its high probability of occurring or the inability to accurately price it.