A Stock with a Stock and Exercise Price of $20

question 58

Multiple Choice

A stock with a stock and exercise price of $20 can either increase to $26 or decrease to $18 over the course of one year. In a one-period binomial option model, given an interest rate of 5% and equal probabilities, what is the likely option price? (Use annual compounding.)

• A) $2.36
• B) $2.50
• C) $2.88
• D) $3.00

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