In a binomial tree created to value an option on a stock, what is the expected return on the option? ( )
A. Zero
B. The return required by the market
C. The risk-free rate
D. It is impossible to know without more information
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A stock is expected to return 10% when the risk-free rate is 4%. What is the correct discount rate to use for the expected payoff on an option in the real world? ( )
A. 4%
B. 10%
C. More than 10%
D. It could be more or less than 10%
What is the number of trading weeks in a year usually assumed for equities? ( )
A. 365
B. 252
C. 12
D. 52
The risk-free rate is 5% and the expected return on a non-dividend-paying stock is 12%. Which of the following is a way of valuing a derivative? ( )
Assume that the expected growth rate for the stock price is 17% and discount the expected payoff at 12%
B. Assuming that the expected growth rate for the stock price is 5% and discounting the expected payoff at 12%
C. Assuming that the expected growth rate for the stock price is 5% and discounting the expected payoff at 5%
D. Assuming that the expected growth rate for the stock price is 12% and discounting the expected payoff at 5%
When there are two dividends on a stock, Black’s approximation sets the value of an American call option equal to which of the following ( )
A. The value of a European option maturing just before the first dividend
B. The value of a European option maturing just before the second (final) dividend
C. The greater of the values in A and B
D. The greater of the value in B and the value assuming no early exercise
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