Binomial Pricing: Gizmo Motors Shares Are Currently Trading for $45

question 64

Multiple Choice

Binomial pricing: Gizmo Motors shares are currently trading for $45 and will either rise to $47 or fall to $42 in one year. The risk-free rate for one year is 5 per cent. You own a call option with a strike price of $30, which expires in one year. What is the value of your call option?

• A) 0
• B) 2.27
• C) 12.05
• D) 16.43

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Definitions:

Demand-for-loanable-funds

The desire or need for borrowing money, driven by individuals, businesses, or governments, often influenced by interest rates.

Supply-of-loanable-funds

Supply-of-loanable-funds is an economic concept depicting the amount of capital available for borrowing in the financial markets, influenced by savings and the desire of investors to lend money.

Decrease

A reduction in quantity, size, or intensity of a specific variable or condition, often used in economic contexts to describe trends in markets or metrics.

Budget Deficit

The financial situation where a government's expenditures exceed its revenues over a specified period, leading to borrowing or debt accumulation.