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%

Question

Quizplus · Accepted Answer

The correct answer is D.There is no easy way of determining the correct discount rate for an option'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.

A Stock Is Expected to Return 10% When the Risk-Free