A Call Option Has a Premium of $0

question 28

Multiple Choice

A call option has a premium of $0.60,a strike price of $40,and 3 months to expiration.The current stock price is $39.60.The stock will pay a $0.80 dividend two months from now.The risk-free rate is 3 percent.What is the premium on a 3-month put with a strike price of $40? Assume the options are European style.

• A) $0.25
• B) $0.51
• C) $0.78
• D) $1.23
• E) $1.50

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Definitions:

Unilateral Contract

A contract where one party makes a promise in exchange for the performance of a specified act by the other party, who is not obligated to perform.

Quasi Contract

An obligation imposed by law to prevent unjust enrichment, where no actual contract exists.

Uniform Commercial Code

A comprehensive set of laws governing commercial transactions in the United States, intended to harmonize the law among the states.

Article 2

A section of the UCC that governs the sale of goods, establishing standards and regulations for contracts and transactions.