Binomial Pricing: Assume That the Shares of Gizmo Motors Are

question 9

Multiple Choice

Binomial pricing: Assume that the shares of Gizmo Motors are currently trading for $17 and will either rise to $23 or fall to $12 in one year. The risk-free rate for one year is 10 per cent. What is the value of a call option with a strike price of $25?

• A) $0
• B) $6.23
• C) $5.72
• D) None of the above

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Definitions:

Equal Annual Amounts

A method of loan repayment or investment that involves paying or receiving the same amount of money each year.

Present Value

The value today of a future sum of money or sequence of cash payments, calculated using a specific return rate.

Lease Payments

Payments made under a lease agreement by the lessee to the lessor for the use of an asset over the lease term.

Present Value

The current worth of a future sum of money or stream of cash flows given a specified rate of return, often used in evaluating investment opportunities.