A Stock with a Current Price of $28 Will Either

question 34

Multiple Choice

A stock with a current price of $28 will either move up by a factor of 1.10 or down by a factor of .90 each period over the next two periods.The risk-free rate of interest is 4 percent.What is the current value of a call option with a strike price of $30?

• A)$1.36
• B)$1.49
• C)$1.71
• D)$2.09
• E)$2.13

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Definitions:

Net Present Value

The contrast in the present value of money received and the present value of money spent over a designated duration, applied in capital budgeting to appraise the profitability of a potential investment.

Cash Inflows

Refers to the money received by a business from its various activities, including sales, investments, financing, etc.

Initial Cost

The upfront expenditure required to purchase an asset or to start a project, including setup or installation fees.

Initial Outlay

The initial investment amount required to start a project or purchase an asset.