Intuition and Option Value suppose a share of stock sells for $75. The risk-free rate is 5
Question:
Intuition and Option Value suppose a share of stock sells for $75. The risk-free rate is 5 percent, and the stock price in one year will be either $85 or S95.
a. What is the value of a call option with a $85 exercise price?
b. What’s wrong here? What would you do?
Step by Step Answer:
a The value of the call is the maximum of the stock price minus the present value of th...View the full answer
Fundamentals of Corporate Finance
ISBN: 978-0077861629
8th Edition
Authors: Stephen A. Ross, Randolph W. Westerfield, Bradford D.Jordan
Related Video
A call option is a type of financial contract that gives the holder the right, but not the obligation, to buy an underlying asset (such as a stock, commodity, or currency) at a specified price (called the strike price) within a specified period of time. When an investor purchases a call option, they are essentially betting that the price of the underlying asset will rise above the strike price before the option\'s expiration date. If the price of the asset does rise above the strike price, the investor can exercise the option by buying the asset at the strike price and then selling it at the higher market price, thereby earning a profit. Call options are often used as a speculative investment strategy, as they allow investors to potentially profit from the upward movement of an asset without having to actually own the asset itself. They are also commonly used as a hedging tool to protect against potential losses in a portfolio.
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