You Own a Share of Common Stock in Vibrapower, Inc

question 1

Multiple Choice

You own a share of common stock in Vibrapower, Inc., which is currently trading for $18 and will either rise to $30 or fall to $12 in one year. Assume the risk-free rate for one year is 0 percent. You also own an American put option on the stock 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 payoff from exercising the option now? (Do not round intermediate computations. Round final answer to two decimal places.)

• A) Option value: $3.33, Net payoff $2
• B) Option value: $3.33, Net payoff $6
• C) Option value: $5.33, Net payoff $2
• D) Option value: $5.33, Net payoff $6

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Definitions:

Rights Warning

Typically refers to the Miranda warning, a notification given by police in the U.S. to criminal suspects in police custody, advising them of their right to silence and legal counsel.

Reasonableness

A standard of fairness and rational behavior expected in legal and contractual relationships.

Presumed Innocent

The principle that an individual is considered innocent until proven guilty in a court of law.

Commercial Property

Real estate property that is used for business activities, such as offices, retail spaces, warehouses, and industrial buildings.