You Need to Find the Price of a European Call

question 92

Multiple Choice

You need to find the price of a European call option on a stock that does not pay dividends.The current price of the shares are $50 and the strike price on the option is $50.The expiration date is 3 months from now and the risk-free rate applicable is 10% per annum.If the standard deviation of the returns on the stock is 20%,what is the price of a single call option?

• A) $6.53
• B) $2.91
• C) $2.65
• D) $2.00

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Definitions:

Price Searchers

Firms that face a downward-sloping demand curve for their product. The amount the firm is able to sell is inversely related to the price it charges.

Price Takers

Sellers who must take the market price in order to sell their product. Because each price taker's output is small relative to the total market, price takers can sell all their output at the market price, but they are unable to sell any of their output at a price higher than the market price.

Market Demand

The total demand for a product or service in a market, summing up individual demands at each price level.

Profit-Maximizing Output

The level of production at which a company can achieve the highest possible profit, considering its cost structure and market demand.