Binomial Pricing: Assume That the Stock of Malcolm's Mufflers, Inc

question 19

Multiple Choice

Binomial pricing: Assume that the stock of Malcolm's Mufflers, Inc,. is currently trading for $18 and will either rise to $20 or fall to $14 in one year. The risk-free rate for one year is 10 percent. What is the value of a call option with a strike price of $15?

• A) $4.39
• B) $3.33
• C) $2.04
• D) $0.83

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Definitions:

Estimated Regression

The process of estimating the relationship between a dependent variable and one or more independent variables.

SSR

Sum of Squares for Regression, a measure in statistical analysis that quantifies the variability explained by the regression model compared to the total variability of the data.

SST

Total Sum of Squares, a measure in statistics that quantifies the total variance in a dataset.

Yearly Income

The total amount of money earned by an individual or entity in one year.