Assume That the Stock of Phoneeffect, Inc

question 53

Multiple Choice

Assume that the stock of Phoneeffect, Inc., is currently trading for $16 and will either rise to $23.50 or fall to $9 in one year. The risk-free rate for one year is 3 percent. What is the value of a put option with a strike price of $18 that expires in three months? (Do not round intermediate computations. Round final answer to two decimal places.)

• A) $0
• B) $2.75
• C) $4.23
• D) $5.73

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Definitions:

Rational Choice

The theory in economics and sociology that suggests individuals always make prudent and logical decisions that provide them with the highest amount of personal utility.

Positively Correlated

Describes a relationship between two variables where they move in the same direction, meaning if one variable increases, the other also increases and vice versa.

Causation

The relationship between cause and effect, where one event (the cause) directly results in the occurrence of another event (the effect).

Loaded Terminology

Phrases or words that contain implicit meanings or emotions designed to influence the listener or reader’s view.