Suppose a Stock Is Currently Trading for $12,and in One

question 61

Multiple Choice

Suppose a stock is currently trading for $12,and in one period it will either increase to $15 or decrease to $8.If the one-period risk-free rate is 4%,what is the price of a European call option that expires in one period and has an exercise price of $7?

• A)$4.68
• B)$4.50
• C)$5.27
• D)$5.00
• E)$7.00

---

Definitions:

Total Fixed Cost

The sum of all costs that remain constant regardless of the level of production or business activity.

Monthly Rent

A regular payment made for the use of property or land on a monthly basis.

Administrative Costs

Expenses related to the general operation of a business rather than production, sales, or other specific functions.

Net Realisable Value Method

An accounting technique used to calculate the value of an inventory or asset, minus any costs associated with its sale or disposal.