A Stock Is Currently Trading at $100 $u = 1.10$ Or Fall by a Factor Of

question 8

Multiple Choice

A stock is currently trading at $100. In each month, the stock will either increase in price by a factor of $u = 1.10$ or fall by a factor of $d = 0.90$ . The risk-free rate of interest per month is 0.1668% in simple terms, i.e., an investment of $1 at the risk-free rate returns $1.001668 after one month. What is the price of a 100-strike, three-month American put option?

• A) $7.20
• B) $7.24
• C) $7.70
• D) $7.74

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Definitions:

Weighted Average Flotation Cost

The average cost of issuing new securities, weighed by the proportion each method of financing contributes to the total new financing, considering costs like underwriting fees and legal expenses.

Flotation Costs

The costs a company faces when issuing new securities, including fees for underwriting, legal services, and registration.

Net Present Value

The value of all future cash flows from a project or investment adjusted to their present value using a discount rate.

Tax Rate

The percentage at which an individual or corporation is taxed, which can vary depending on income level or earnings before taxes.