Find the Price of a European Call on a Futures

question 25

Multiple Choice

Find the price of a European call on a futures contract if the futures price is $106,the exercise price is $100,the continuously compounded risk-free rate is 7.2 percent,the volatility is 0.41 and the call expires in six months.

• A)$14.57
• B)$17.04
• C)$6.00
• D)$19.78
• E)none of the above

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Definitions:

Decreasing-Cost Industry

An industry where the average cost of production decreases as the industry grows and output increases, often due to economies of scale.

Demand Occurs

The moment at which consumers are willing and able to purchase a good or service at a given price.

Long-Run Equilibrium

A state in which all factors of production and costs are variable, and firms in the industry are earning only normal profits, with no incentive for entry or exit.

Inferior Good

A good or service whose consumption declines as income rises, prices held constant.