Compute for the following 12-month call option on a non-dividend paying stock. The stock is selling for 20. The strike price is 20. The possible prices of the underlying stock at the end of 12 months are 35 and 10. The continuously compounded interest rate is 5%. Using the binomial model, which of the following is closest to ?

0

.20

.40

.60

.80

Which is closest to the fair price for the option in the previous question?

2

5

8

11

14

Assume the continuously compounded annual interest rate is 2%. XYZ corporation stock does not pay dividends and is currently trading at $30. You enter into a forward contract to buy XYZ stock in one year. What is closest to the fair forward price for this contract?

$29

$29.50

$30

$30.50

$31

Suppose immediately after signing the agreement (and delivering the money) in the previous question, the continuously compounded interest rate jumps to 10%, and the stock price falls to $28. You wish to terminate your agreement. What is closest to a fair payment from your counterparty to you to terminate the agreement? (A negative number would reflect a payment from you to the counterparty.)

a.    -$2

b.    -$1

c.     $0

d.    $1

e.    $2