Calculate the intrinsic values of the four call options in Table 1. Explain to your Aunt Betty what intrinsic value means in the call option case, and how this value relates to the concepts of “in-the-money” and “out-of-the-money” in the case of call options. 2)Explain to Aunt Betty the relationship between the price of a call and its exercise price. Is this relationship confirmed by your calculations in #6 (above)?
Your Aunt Betty has a $120,000 investment portfolio comprising some Government of Canada three-month Treasury Bills and 2,000 Suncor shares. When the portfolio was formed (one month ago), the shares were worth $85,700 and the bonds were worth $34,300. Today, Suncor shares are worth $41.94 per share, while the bond yields have decreased so that the bonds are now worth $38,000. The effective yield on the three-month Canada Treasury Bill is 0.94% per annum.
Aunt Betty is a bit concerned about the drop in value of her Suncor shares and consequently, her overall portfolio value. Knowing that you are taking a finance course, she consults you to see what she can do to protect her portfolio from a further drop in value. She has heard a lot about call and put options and would like to know more about these.
You immediately go online to look for information on options on Suncor shares. You find the following pricing information on the call options (Table 1) and the put options (Table 2) on Suncor, with expiry in one month:
Table 1: Call option prices
|
Strike |
Last |
Chg |
Bid |
Ask |
Vol |
Open Int |
|
41.50 |
0.43 |
–0.01 |
0.42 |
0.45 |
98 |
96 |
|
42.00 |
0.33 |
+0.13 |
0.36 |
0.39 |
101 |
38 |
|
42.50 |
0.12 |
+0.02 |
0.10 |
0.16 |
62 |
11 |
|
43.00 |
0.05 |
0.00 |
0.05 |
0.08 |
2 |
12 |
Table 2: Put option prices
|
Strike |
Last |
Chg |
Bid |
Ask |
Vol |
Open Int |
|
40.50 |
0.10 |
0.00 |
0.09 |
0.10 |
5 |
5 |
|
41.00 |
0.06 |
–0.18 |
0.04 |
0.06 |
10 |
12 |
|
41.50 |
0.13 |
–0.18 |
0.10 |
0.13 |
48 |
57 |
|
42.00 |
0.39 |
–0.48 |
0.30 |
0.39 |
91 |
1 |
|
42.50 |
1.22 |
0.00 |
1.00 |
1.25 |
64 |
64 |
- Calculate the intrinsic values of the four call options in Table 1. Explain to your Aunt Betty what intrinsic value means in the call option case, and how this value relates to the concepts of “in-the-money” and “out-of-the-money” in the case of call options.
2)Explain to Aunt Betty the relationship between the price of a call and its exercise price. Is this relationship confirmed by your calculations in #6 (above)?
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