Binomial Pricing: Consider a Call Option and a Put Option

question 87

Multiple Choice

Binomial pricing: Consider a call option and a put option both written on ABC, Inc. stock. Both options have a strike price of $20 and expire in one year. The stock of ABC, Inc., is currently selling for $20. In one month the stock will be at either $24 or $18. The risk-free rate is 0 percent. Which is worth more, the put option or the call option?

• A) The put option is worth more.
• B) The call option is worth more.
• C) They are worth the same.
• D) There is not enough information.

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Definitions:

Reorder Point

The inventory level at which a new order should be placed to replenish stock before it depletes to a critical level.

Fixed-Period Model

An inventory control model where orders are placed at fixed intervals, such as weekly or monthly, regardless of inventory level.

Safety Stock

A quantity of stock kept on hand to protect against unexpected increases in demand or delays in supply delivery.

Production Order Quantity Model

An economic order quantity technique applied to production orders.