A stock is currently priced at $38. A call option with an expiration of one year has an exercise price of $40. The risk-free rate is 4.2 percent per year, compounded continuously, and the standard deviation of the stock's return is infinitely large. What is the price of the call option?
A) $2.47
B) $34.80
C) $38.00
D) $5.63
E) $40.00

Question

Quizplus · Accepted Answer

When the standard deviation of the stock's return is infinitely large, it implies that the stock price can potentially reach any value. In this scenario, the value of a call option converges to the current stock price, because the option provides unlimited upside with no downside risk. Hence, the price of the call option is equal to the current stock price of $38.

A Stock Is Currently Priced at $38