You Need to Find the Price of a European Call

question 91

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:

Equilibrium Quantity

The quantity of goods or services supplied is exactly equal to the quantity demanded at the market price.

Upward-Sloping Demand

A representation typically contrary to the law of demand, suggesting that as prices increase, the quantity demanded also increases. Generally, this is indicative of Giffen or Veblen goods.

Equilibrium Price

The price at which the quantity of a good or service demanded by consumers is equal to the quantity supplied by producers, leading to market balance.

Velcro

A fastening device consisting of two strips of fabric, one covered with tiny hooks and the other with a dense pile, which adhere when pressed together.