Binomial Pricing: You Own a Share of Ordinary Shares in Good

question 45

Multiple Choice

Binomial pricing: You own a share of ordinary shares in Good Health Foods, which are currently trading for $18 and will either rise to $30 or fall to $12 in one year. The risk-free rate for one year is 0 per cent. You also own an American put option on the shares with a strike price of $20, which expires in one year. What is the value of the put option, and what would be the net pay-off from exercising the option now?

• A) Option Value: $3.33 - Net Pay-off $2
• B) Option Value: $3.33 - Net Pay-off $6
• C) Option Value: $5.33 - Net Pay-off $2
• D) Option Value: $5.33 - Net Pay-off $6

Understand the concept of mixed costs and their components (fixed and variable costs).

Estimate costs using the least-squares regression method.

Calculate total variable cost per unit.

Determine the total fixed manufacturing cost.

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Definitions:

Rate of Production

The speed or efficiency at which goods are manufactured or services are provided, usually measured over a specific time period.

Corresponding Raise

A salary increase that aligns with an employee's performance, inflation, or market rate adjustments.

Commodification

The process of turning goods, services, ideas, or people into commodities that can be bought, sold, or traded in a market.

Virtual Puppy

A digital or computer-generated representation of a puppy, often used in applications, games, or as part of virtual pet ownership experiences.