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A call option on Rosenstein Corporation stock has a market price of $7. The stock sells for

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A call option on Rosenstein Corporation stock has a market price of $7. The stock sells for $31 a share, and the option has an exercise price of $25 a share.

a. What is the exercise value of the call option?

b. What is the premium on the option?

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Call options market price 7 Stocks price 31 Optio...View the full answer


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Fundamentals of Financial Management

Fundamentals of Financial Management

ISBN: 978-1337395250

15th edition

Authors: Eugene F. Brigham, Joel F. Houston

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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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