The Current Price of a Stock Is $50

question 27

Multiple Choice

The current price of a stock is $50. Every month, the stock price will rise by a factor of 1.2 or fall by a factor of 0.8; and a $1 risk-free investment will be worth $1.03. Dividends are paid as a proportion of 0.02 of the stock price. What can you say about the the 49-strike, European and American six-month calls if the risk-less investment grows to $1.05 (instead of $1.03) each period, and the dividend rate increases to 0.04?

• A) The European call rises in value and the American call rises in value.
• B) The European call rises in value and the American call falls in value.
• C) The European call falls in value and the American call rises in value.
• D) The European call falls in value and the American call falls in value.

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Definitions:

Michigan Football

The football team representing the University of Michigan, known for its history and achievements in college football.

Gain Yards

A term often used in American football to describe the act of advancing the ball closer to the opposing team's goal line.

Probability .50

A statistical measure indicating that an event has an equal chance of occurring or not occurring, often represented as a 50% chance.

Nash Equilibrium

A concept in game theory where each player's strategy is optimal, given the strategies of all other players, leading to a situation where no player has an incentive to unilaterally change their strategy.