Binomial Pricing: Assume That the Stock of ABC, Inc

question 98

Multiple Choice

Binomial pricing: Assume that the stock of ABC, Inc., is currently trading for $18 and will either rise to $30 or fall to $12 in one year. The risk-free rate for one year is 0 percent. What is the value of a put option with a strike price of $15?

• A) $0
• B) $2
• C) $5
• D) $6

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Definitions:

Sellers and Buyers

Parties involved in a transaction where goods, services, or assets are exchanged from the seller (provider) to the buyer (purchaser).

Liquidated Damages

A predetermined amount of money that must be paid as damages for failure to perform under a contract.

Identified Before Breach

A legal term referring to goods specified by the buyer and seller in a contract for sale before any default occurs.

Nominal Damages

A small amount of money awarded by a court to recognize that a legal wrong has occurred, but no substantial harm was done.