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

question 56

Multiple Choice

Binomial pricing: Assume that the stock of Malcolm's Mufflers, Inc., is currently trading for $43 and will either rise to $55 or fall to $17 in one year. The risk-free rate for one year is 8 percent. What is the value of a call option with a strike price of $45?

• A) $4.40
• B) $5.84
• C) $6.84
• D) $7.17

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Definitions:

Proposition

A statement that expresses a judgement or opinion which can be either true or false.

Modus Ponens

A logical argument form where if a conditional statement ("if p then q") and its antecedent (p) are true, then the consequent (q) is also true.

Antecedent

In logic and grammar, the antecedent is the preceding clause, phrase, or word to which another word, particularly a pronoun, refers back.

Pure Hypothetical

A speculative statement or proposition that is considered in abstraction from any particular instance or factual situation.