Option Valuation: Consider a Call Option with a Strike Price

question 47

Multiple Choice

Option valuation: Consider a call option with a strike price of $20, which expires in one year. The risk-free rate of interest is 5 per cent. The underlying share price is $30. Without arbitrage, which of the following is a possible price for the call option?

• A) $0
• B) $8
• C) $15
• D) None of the above

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Definitions:

Pure Monopoly

A pure monopoly occurs when a single company or entity is the sole provider of a particular product or service in a market, with no close substitutes.

Oligopolistic Competition

A market structure characterized by a small number of firms dominating the market, leading to limited competition and high barriers to entry for new competitors.

Competitive Market

A market structure characterized by a large number of sellers and buyers, leading to competitive prices and quality of goods and services.

Pure Competition

A market structure characterized by a large number of small firms, a homogeneous product, complete information, and free entry and exit, leading to price taking behavior.