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9.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%

A.4%

B.10%

C.More than 10%

D.It could be more or less than 10%

Answer: D

The correct answer is D. There is no easy way of determining the correct discount rate for an optionâ€™s expected payoff in the real world. For a call option the correct discount rate in the real world is often quite high and for a put option it is often quite low (even negative). The example in the text illustrates this

The correct answer is D. There is no easy way of determining the correct discount rate for an optionâ€™s expected payoff in the real world. For a call option the correct discount rate in the real world is often quite high and for a put option it is often quite low (even negative). The example in the text illustrates this

Flashcard info:

Author: CoboCards-User

Main topic: Finance & Investment

Topic: Derivatives

Published: 27.10.2015