CMA Final · Strategic Financial Management · Options
Shares of Narmada Steel trade at ₹200. In one period the price may rise to ₹240 or fall to ₹160. A one-period call has strike ₹210. The risk-free rate is 5% for the period. Using the risk-neutral probability method, what is the call value (nearest rupee-paise)?
The risk-neutral probability of an up move is 0.625, expected payoff is 18.75, and discounting at 5% gives about ₹17.86. Ignoring discounting or using probability 0.5 gives different, incorrect values.
- A₹14.29Correct
- B₹15.00
- C₹30.00
- D₹12.50
Explanation
Up factor 1.2, down 0.8. p = (1.05 − 0.8)/(1.2 − 0.8) = 0.625. Payoffs: up 30, down 0. Expected = 0.625×30 = 18.75; discounted = 18.75/1.05 = ₹17.86. Hence none of the stated options matches exactly; correct value is ₹17.86.
Did you get it right without looking?
One question tells you little. A timed set on Options shows your real accuracy, how long you take and where you lose marks.
More Options questions
- A share is at ₹100. In one year it can be either ₹120 or ₹80. A one-year European call has a strike of ₹100. The risk-free rate is 10% per a…
- A call option on a share has a strike price of ₹200 and a premium of ₹15. A put option on the same share with the same strike and expiry has…
- A call option on a share with strike ₹500 has a delta of 0.6. An investor holds 10,000 shares and wishes to be delta neutral by writing call…
- Shares of Godavari Steel are at ₹100. In a one-period binomial model the price will become either ₹120 or ₹80. The risk-free rate is 5% for …
- A European call and put on Sundaram Textiles share have the same strike ₹300 and expiry in 6 months. The share price is ₹310, the call is pr…
- A trader sets up a bull call spread on a stock with a lot size of 1,000 shares: buys a call with strike Rs 100 at a premium of Rs 12 and sel…