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

question 16

Multiple Choice

Use the following data for a single-period binomial model to answer the questions that follow.
- The stock's price S is $50.After three months,it either goes up by the factor U = 1.16038286 or it goes down by the factor D = 0.85963276.
- Options mature after T =0 0.25 years.
- The continuously compounded risk-free interest rate r is 4 percent per year.
-Given the above data,consider an exotic option whose payoff at expiration is given by the stock price S(1) squared less a strike price (K= $2,500) if it has a positive value,zero otherwise,that is: max[S(1) ²- 2500,0].
The value of this exotic option is given by:

• A) $350.06
• B) $428.92
• C) $451.92
• D) $676.50
• E) None of these answers are correct.

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Definitions:

Estimated Payments

Estimated Payments are periodic prepayments of taxes on income that is not subject to withholding, such as self-employment income, interest, and dividends.

Subject to Withholding

Income that is subject to tax withholding by the payer, which includes wages, certain types of gambling winnings, and other payments.

Dependent

An individual, usually a child or spouse, who relies on another person for financial support and qualifies for certain tax benefits.

Exemption Amount

The portion of an individual's or entity's income that is not subject to tax, reducing taxable income.