A Stock Is Trading at 100 $u = 1.20$ And $d = 0.80$

question 27

Multiple Choice

A stock is trading at 100. Consider a two-period binomial model in which the stock price moves up or down each period by factors $u = 1.20$ and $d = 0.80$ , respectively. The gross risk-free rate of interest per time step is 1.04. You are long a cash-or-nothing digital call option that pays $100 if $S _ { T } \geq 100$ , and nothing otherwise; and short a cash-or-nothing digital put option that pays $100 if $S _ { T } \leq 100$ , and nothing otherwise. (Here, $S _ { T }$ is the stock price at the end of two periods.) The value of your portfolio is

• A) Positive.
• B) zero.
• C) Negative.
• D) Cannot be calculated from the given information.

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