Binomial Pricing: Assume That the Shares of New Wave Property

question 56

Multiple Choice

Binomial pricing: Assume that the shares of New Wave Property are currently trading for $21 and will either rise to $30 or fall to $18 in one year. The risk-free rate for one year is 0 per cent. You own a portfolio that consists of one call option and one put option. Both options have a strike price of $25, and both expire in one year. What is the value of your portfolio?

• A) $0
• B) $25.00
• C) $6.00
• D) $6.50

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Definitions:

Connective

A logical operator that connects two propositions in a compound sentence, such as and, or, not, if...then.

Assert

To state a fact or belief confidently and forcefully.

Proposition

An expressed opinion or statement, often one put forward for consideration or argument.

Connectives

Words or phrases in grammar or logic that connect statements, clauses, sentences, or words, forming a compound statement.