QUESTION 1

Suppose Carol's stock price is currently $34. In the next six months it will either fall to $24.7 or rise to $54.7. What is the current value of a six-month call option with an exercise price of $27.4? The six-month risk-free interest rate is 5 percent per six-month period. (Use the risk-neutral valuation method.)

A. $9.53

B. $10.03

C. $16.63

QUESTION 2

Consider the following data for a European option: Expiration = 6 months; Stock price = $90; Dividend = $0; Exercise price = $85; Call option price = $12; Risk-free rate = 6 percent per year. Using put-call parity, calculate the price of a put option having the same exercise price and expiration date.

A. $2.42

B. $4.56

C. $2.77

QUESTION 3

Suppose you borrow $96.44 for one year at 5.5 percent and invest $96.44 for two years at 7.5 percent. For the time period beginning one year from today, you have:

A. invested at 7.5 percent.

B. borrowed at 9.5 percent.

C. invested at 9.5 percent.

QUESTION 4

A call option on ABCD stock, with an exercise price of $65.0, will either be worth $27.0 or worthless. The call option has a delta of 0.40. What is the binomial spread of possible stock prices?

A. Low of $24.50 and high of $92

B. Low of $65.0 and high of $92

C. Low of $83.00 and high of $92