Suppose a Stock Is Currently Trading for $23,and in One

question 18

Multiple Choice

Suppose a stock is currently trading for $23,and in one period it will either increase to $30 or decrease to $20.If the one-period risk-free rate is 5%,what is the price of a European call option that expires in one period and has an exercise price of $25?

• A)$1.25
• B)$1.98
• C)$1.50
• D)$2.21
• E)$2.50

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Definitions:

Proposition

A statement or assertion expressing a judgment or opinion that can be either true or false.

Playoffs

A series of games or matches to determine a championship or a team's ranking at the end of a league season.

Pillsbury Dough Boy

A fictional character and advertising mascot for the Pillsbury Company, known for his giggle when poked in the belly.

Subject

The part of a sentence or clause that denotes who or what performs the action or is described.