The common stock of Trynor's, Inc. is currently priced at $37.90 a share. One year from now, the stock price is expected to be either $38 or $43 a share. The risk-free rate of return is 3.5 percent. What is the current value of one call option on this stock if the exercise price is $40?

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The value of the call option can be calculated using the binomial option pricing model. First, calculate the up and down factors (u and d), and then the risk-neutral probabilities (p and 1-p). However, given the simplicity of the scenario, we can directly calculate the expected payoff and discount it back at the risk-free rate.1. If the stock goes up to $43, the call option will be worth $3 ($43 - $40 exercise price). If the stock goes down to $38, the option will be worth $0 (since it's out of the money).2. The expected payoff of the option is the probability-weighted average of these outcomes. However, without explicit probabilities, we can simplify by considering the outcomes equally likely or use risk-neutral valuation, which essentially does this in a more complex setting.3. Discount the expected payoff at the risk-free rate to get the present value.Expected payoff = (0.5 * $3 + 0.5 * $0) = $1.5 / 2 = $0.75. Then, discount this back one year at the risk-free rate of 3.5%.$$ \text{Present Value} = \frac{\$0.75}{1 + 0.035} = \frac{\$0.75}{1.035} \approx \$0.7246 $$The closest answer to this calculation is $0.71, which is option B. This is a simplified approach and assumes a basic understanding of option pricing and the risk-neutral valuation principle.

The Common Stock of Trynor's, Inc