In a One-Period Binomial Model, Assume That the Current Stock

question 22

Multiple Choice

In a one-period binomial model, assume that the current stock price is $100, and that it will rise to $110 or fall to $90 after one month. If an investment of a dollar at the risk-free rate returns $1.001668 after one month, and the 98-strike put option is trading at $2, how much arbitrage profit can you make in present value terms?

• A) $1.93
• B) $2.92
• C) $3.93
• D) $8.00

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Definitions:

Output Increases

A rise in the amount of goods or services produced by an entity.

Average Costs

The total cost of production divided by the number of goods produced; it decreases as production increases.

Average Costs

The average expense associated with producing a good or service, typically calculated by dividing the total costs by the quantity of goods or services produced.

Output Increases

A situation where the production level of goods or services in an economy or firm rises.