Call options with an exercise price of $49 and one year to expiration are available. The market price of the underlying stock is currently $40, but this market price is expected to either decrease to $52 or increase to $37 in a year's time. Assume the risk-free rate is 8%. What is the value of the option? (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit any commas and the $ sign in your response. For example, an answer of $1,000.50 should be entered as 1000.50.) Numeric Response
Call options with an exercise price of $49 and one year to expiration are available. The market price of the underlying stock is currently $40, but this market price is expected to either decrease to $52 or increase to $37 in a year's time. Assume the risk-free rate is 8%. What is the value of the option? (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit any commas and the $ sign in your response. For example, an answer of $1,000.50 should be entered as 1000.50.) Numeric Response
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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38) can you please help with this question?
Transcribed Image Text:Call options with an exercise price of $49 and one year to expiration are available. The market price of the underlying stock is currently $40, but this market price is
expected to either decrease to $52 or increase to $37 in a year's time. Assume the risk-free rate is 8%. What is the value of the option? (Do not round intermediate
calculations. Round the final answer to 2 decimal places. Omit any commas and the $ sign in your response. For example, an answer of $1,000.50 should be
entered as 1000.50.)
Numeric Response
Expert Solution
Step 1
Options prices, known as premiums, are made up of the total of the intrinsic and time value of the option. The price difference between the current stock price and the strike price is known as intrinsic value.
An option's time value, also known as its extrinsic value, is the amount of premium paid in excess of its intrinsic value. When there is more time until expiry, the time value increases because investors have a larger possibility that the contract will be lucrative.
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