The value derived from exercising an option immediately is the exercise value. No rational investor would exercise an option that is out-of-the-money, so the minimum exercise value is zero. The following table provides information regarding options on ABC Corp. stock. Because the stock’s price is volatile, investors trade options to either hedge their positions or speculate on price movements. Investors can either buy options or “issue” new options, which is called writing options. Based on your understanding of exercise value and option prices, complete the table with a strike price of $30.00: Stock Price ($) Strike Price ($) Exercise Value ($) Market Price of Option ($) Time Value ($) 20.00 30.00 0.00 1.56 40.00 30.00 12.10 2.10 50.00 30.00 22.40 2.40 55.00 30.00 25.00 27.60 60.00 30.00 34.00 4.00 After two weeks, the stock price of ABC Corp. increases to $62.40. Suppose you purchased the shares for $40.00 and then sell the shares at $62.40; your rate of return will be ______ on that transaction. After your analysis, you decided to purchase the option for $12.10, which gives you the right to buy ABC Corp.’s stock at $30.00. If you exercise the option by purchasing the stock at the strike price, you could immediately sell the share of the stock at its market price of $62.40. This will result in a payoff, and the rate of return on your option will be_______
The value derived from exercising an option immediately is the exercise value. No rational investor would exercise an option that is out-of-the-money, so the minimum exercise value is zero. The following table provides information regarding options on ABC Corp. stock. Because the stock’s price is volatile, investors trade options to either hedge their positions or speculate on price movements. Investors can either buy options or “issue” new options, which is called writing options. Based on your understanding of exercise value and option prices, complete the table with a strike price of $30.00: Stock Price ($) Strike Price ($) Exercise Value ($) Market Price of Option ($) Time Value ($) 20.00 30.00 0.00 1.56 40.00 30.00 12.10 2.10 50.00 30.00 22.40 2.40 55.00 30.00 25.00 27.60 60.00 30.00 34.00 4.00 After two weeks, the stock price of ABC Corp. increases to $62.40. Suppose you purchased the shares for $40.00 and then sell the shares at $62.40; your rate of return will be ______ on that transaction. After your analysis, you decided to purchase the option for $12.10, which gives you the right to buy ABC Corp.’s stock at $30.00. If you exercise the option by purchasing the stock at the strike price, you could immediately sell the share of the stock at its market price of $62.40. This will result in a payoff, and the rate of return on your option will be_______
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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The value derived from exercising an option immediately is the exercise value. No rational investor would exercise an option that is out-of-the-money, so the minimum exercise value is zero.
The following table provides information regarding options on ABC Corp. stock. Because the stock’s price is volatile, investors trade options to either hedge their positions or speculate on price movements. Investors can either buy options or “issue” new options, which is called writing options.
Based on your understanding of exercise value and option prices, complete the table with a strike price of $30.00:
|
Stock Price ($)
|
Strike Price ($)
|
Exercise Value ($)
|
Market Price of Option ($)
|
Time Value ($)
|
|---|---|---|---|---|
| 20.00 | 30.00 | 0.00 | 1.56 | |
| 40.00 | 30.00 | 12.10 | 2.10 | |
| 50.00 | 30.00 | 22.40 | 2.40 | |
| 55.00 | 30.00 | 25.00 | 27.60 | |
| 60.00 | 30.00 | 34.00 | 4.00 |
After two weeks, the stock price of ABC Corp. increases to $62.40. Suppose you purchased the shares for $40.00 and then sell the shares at $62.40; your rate of return will be ______ on that transaction.
After your analysis, you decided to purchase the option for $12.10, which gives you the right to buy ABC Corp.’s stock at $30.00. If you exercise the option by purchasing the stock at the strike price, you could immediately sell the share of the stock at its market price of $62.40. This will result in a payoff, and the rate of return on your option will be_______
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