Use the Following Data for a Two-Period Binomial Model to Answer

question 13

Multiple Choice

Use the following data for a two-period binomial model to answer the questions that follow.
- The stock's price S is $100.After three months,it either goes up and gets multiplied by the factor U = 1.13847256,or it goes down and gets multiplied by the factor
D = 0.88664332.
- Options mature after T = 0.5 year and have a strike price of K = $105.
- The continuously compounded risk-free interest rate r is 5 percent per year.
-If the stock pays a 1 percent dividend just before the end of the first three months,then today's price of a European put is:

• A) $8.41
• B) $9.09
• C) $9.12
• D) $10.03
• E) None of these answers are correct.

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Definitions:

Availability Heuristic

This is a mental shortcut that relies on immediate examples that come to a person's mind when evaluating a specific topic, concept, method, or decision.

Representativeness Bias

A cognitive bias where individuals judge the probability of an event by how much it resembles their existing stereotypes or expectations, rather than based on actual statistical evidence.

Self-fulfilling Prophecy

A belief or expectation that an individual holds that comes true because he or she acts in ways that support or lead to its fulfilment.

Discrimination

The unjust or prejudicial treatment of different categories of people, especially on the grounds of race, age, sex, or disability.