A stock currently has a price of 45.00 and pays no dividends. One year from now, there is a 50% (risk-neutral) probability that the price ofthe stock will be 30.00 and 50% that it will be greater than 40.00.The risk-free rate is 4%.Calculate the price of a one-year European call option with an exercise price of 40.00.Possible AnswerA 4.81B 6.359.81D 10.00E 1135

European call can be exercised on the expiration of call option unlike the American call option…

Answered: be greater than 40.00. The risk-free…

be greater than 40.00. The risk-free rate is 4%. Calculate the price of a one-year European call option with an exercise price of 40.00. Possible Answen 4.81 B6.35 C 981 D 10.00

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Concept explainers

Exchange Rate Risk

It is the possibility that the value of a currency will fluctuate in the future. In the wake of globalization, business establishments have increasingly ventured into international markets. The volume of international trade has prospered excellently in the near past and is expected to be more affluent in the future. The use of exchange-traded derivative financial instruments has been multi-folded to provide for the requirements of various MNCs and offshore potential investors. Most banks and financial institutions have helped integrate the global economies. Our Government has introduced some bold and extreme measures to fulfil the purpose behind the fiscal, industrial, and monetary policies. The enactment of GST is a huge step towards streamlining the taxation system of the country. Owing to Covid-19, this aspect of corporate risk management has become critical.

Question

A stock currently has a price of 45.00 and pays no dividends. One year from now, there is a 50% (risk-neutral) probability that the price of
the stock will be 30.00 and 50% that it will be greater than 40.00.
The risk-free rate is 4%.
Calculate the price of a one-year European call option with an exercise price of 40.00.
Possible Answer
A 4.81
B 6.35
9.81
D 10.00
E 1135

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