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A call option matures in six months. The underlying stock price is $75, and the stocks return

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A call option matures in six months. The underlying stock price is $75, and the stock’s return has a standard deviation of 30 percent per year. The risk-free rate is 4 percent per year, compounded continuously. If the exercise price is $0, what is the price of the call option?

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Corporate Finance

Corporate Finance

ISBN: 978-0077861759

10th edition

Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe

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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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