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Question :
20.1 Multiple Choice
1) Assume a stock price of S(0) = : 2041225

20.1 Multiple Choice

1) Assume a stock price of S(0) = $62.00, r = 0.05, *σ* = 0.30, and dividend = 0. What is the price of a claim that pays ? Use formula 20.29.

A) $7.59

B) $8.59

C) $9.59

D) $10.59

2) Assume a stock price of S(0) = $83.00, r = 0.045, *σ* = 0.25, and dividend = 0.02. What is the price of a claim that pays S3? Use formula 20.29.

A) $423,323

B) $710,695

C) $624,165

D) $818,123

3) Assume a stock price of S(0) = $45.00, r = 0.03, *σ* = 0.40, and dividend = 0.015. What is the price of a claim that pays ? Use formula 20.29.

A) $6.41

B) $5.41

C) $4.41

D) $3.41

4) Assume a stock price of S(0) = $80.00, r = 0.05, *σ* = 0.35, and dividend = 0.01. What is the price of a claim that pays S-2/3? Use formula 20.29.

A) $0.25

B) $0.35

C) $0.05

D) $0.15

5) Assume the following: LN(S) and LN(Q) have a correlation coefficient of 0.40, S(0) = 60, Q(0) = 60, r = 0.05, *σ*s = 0.30 *σ*Q = 0.25, and dividend = 0. Using formula 20.39, what is the price of a claim that pays ?

A) $243.96

B) $322.96

C) $479.96

D) $532.96

6) Assume the following: LN(S) and LN(Q) have a correlation coefficient of -0.65, S(0) = 55, Q(0) = 60, r = 0.04, *σ*s = 0.22 *σ*Q = 0.15, and dividends = 0. Using formula 20.39, what is the price of a claim that pays Q/?

A) $8.16

B) $9.16

C) $10.16

D) $11.16

7) Assume the following: LN(S) and LN(Q) have a correlation coefficient of -0.20, S(0) = 45, S(Q) = 55, r = 0.03, *σ*s = 0.18 *σ*Q = 0.28, and no dividends. Using formula 20.39, what is the price of a claim that pays 1/?

A) $3.02

B) $2.02

C) $1.02

D) $0.02

8) The value of Z(t) at any point in time can be described as a process in which there is a cumulative effect of infinitely small movements. This process is called:

A) Ornstein-Uhlenbeck

B) Diffusion

C) Ito

D) Geometric

9) A modification to the Brownian process that permits mean reversion is called:

A) Ornstein-Uhlenbeck

B) Diffusion

C) Ito

D) Geometric

10) A modification to the Brownian process in which the drift and volatility depend on the stock price is called:

A) Ornstein-Uhlenbeck

B) Diffusion

C) Ito

D) Geometric

11) For purposes of option pricing, when the movement of a stock price follows a geometric Brownian motion, the stock price is said to follow which type of distribution?

A) Bimodal

B) Latin hypercube

C) Lognormal

D) Normal

12) A Brownian motion is a stochastic process that can be described as a:

A) Pattern of movements with continuous movements

B) Pattern of movements with discrete movements

C) Random walk with continuous movements

D) Random walk with discrete movements

13) The deterministic drift of a pure Brownian motion that is virtually undetectable is sometimes referred to as the:

A) Distribution

B) Expected return

C) Random walk

D) Standard deviation