Quiz Space

Corporate Finance · End Term · 10 May 2026 · January 2026 term · Set 1-2

Question 22: A stock currently trading at Rs 25 can either rise to Rs…

Question 22

+3 marksOne correct option

A stock currently trading at Rs 25 can either rise to Rs 30 or fall to Rs 20 in three months. The three-month risk-free rate is 4%. Using the risk-neutral approach, what is the risk-neutral probability that the stock price increases?

  1. A

    78.6%

  2. B

    60.0%

  3. C

    48.9%

  4. D

    43.1%

Show answer

Correct answer

  • B

    60.0%

See the whole paperTake it as a mock test

Question 22 of 35 in the IIT Madras BS Corporate Finance (Corporate Finance) End Term paper sat on 10 May 2026, in the January 2026 term (Corporate Finance 06 May 26). It carries 3 marks.

More questions from this paper

  1. Q1If the real interest rate is 15.5% and the expected inflation rate is 10.2%, the nominal interest rate is 4.81%.
  2. Q2A downward-sloping yield curve indicates that long-term interest rates are higher than short-term interest rates.
  3. Q3If the exchange rate changes from 90 Rupees per Dollar to 95 Rupees per Dollar, then the Rupee has depreciated, and it …
  4. Q4An American call option gives the holder the right to buy the underlying asset at the strike price on or before the exp…
  5. Q5A bank’s capital ratio is defined as the ratio of its liabilities to its total assets.
  6. Q6Capital requirements and asset restrictions are governance tools to develop safeguards against banking collapse.
  7. Q7If an investor writes a put option, her maximum potential loss is the strike price minus the premium received.
  8. Q8Suppose the current market price of a stock is Rs. 82. If a put option on this stock has a strike price of Rs. 80, then…
  9. Q9The Efficient Market Hypothesis asserts that a trader should not be able to use any available information to predict fu…
  10. Q10The risk-free rate is 3%. The expected market rate of return is 9%, and the standard deviation of the market return is …
  11. Q11In the Black-Scholes pricing formula, the stock prices are considered to be log-normally distributed.
  12. Q12A long position in an option describes holding an option contract with a maturity of more than 2 years.
  13. Q13A call option decreases in value when the stock price increases, with all else remaining the same.
  14. Q14A long straddle strategy requires buying both a call and a put option, each with a different strike price and different…
  15. Q15The part of the minimum variance set that lies below the global minimum variance portfolio is called the efficient fron…
  16. Q16Suppose you purchased a call option 22 days ago for Rs. 5.50. The call option has a strike price of Rs. 64, and the sto…
  17. Q17OPQ Inc. has an expected rate of return of 20% and a standard deviation of the rate of return of 18%. The expected mark…
  18. Q18Suppose that the interest rate at a point in time in the domestic economy is 5%, and the interest rate in the foreign e…
  19. Q19A trader buys a call option on a stock with a strike price of Rs 78 when the option price is Rs 4. The trader makes a p…
  20. Q20Figure question
  21. Q21A firm has three divisions: sales division, accounting division and logistics division. The sales division has a beta o…
  22. Q23Your expected return on a stock is 18%. The stock has a beta of 1.6. If the risk-free rate is 4% and the expected marke…
  23. Q24A risky asset has an expected rate of return of 18%, and the Sharpe ratio of this risky asset is 0.75. If the risk-free…
  24. Q25Figure question
  25. Q26Lokesh is considering investing in an opportunity that promises to pay Rs 2,000 in one year, Rs 2,500 in two years and …
  26. Q27The price of a six-month European put option on a non-dividend-paying stock with a strike price of Rs 450 is Rs 30. The…
  27. Q28The current price of a non-dividend-paying stock is Rs 60. Over the next six months, it is expected to rise to Rs 75 or…
  28. Q29Figure question
  29. Q30An employee contributes 100 rupees per year to a retirement account with 7% average annual returns. She starts contribu…
  30. Q31A stock is trading at Rs 40 today. In six months, the stock price can either increase to Rs 50 or decrease to Rs 35. Th…
  31. Q32A one-year European call option with a strike price of Rs 80 is selling at a call price of Rs 4. A one-year European pu…
  32. Q33Figure question
  33. Q34An investor purchases one call option and two put options with the same strike price of Rs 65 and maturity of three mon…
  34. Q35A project is expected to have a payoff of Rs 4,000 in one year. The beta for the project is 1.5. If the risk-free rate …