Ken is interested in buying a European call option written on Southeastern Airlines, Inc., a nondividend-paying common
Question:
Ken is interested in buying a European call option written on Southeastern Airlines, Inc., a nondividend-paying common stock, with a strike price of $60 and one year until expiration. Currently, the company’s stock sells for $62 per share. Ken knows that, in one year, the company’s stock will be trading at either $73 per share or $49 per share. Ken is able to borrow and lend at the risk-free EAR of 2.5 percent.
a. What should the call option sell for today?
b. If no options currently trade on the stock, is there a way to create a synthetic call option with identical payoffs to the call option just described? If there is, how would you do it?
c. How much does the synthetic call option cost? Is this greater than, less than, or equal to what the actual call option costs? Does this make sense?
Strike PriceIn finance, the strike price of an option is the fixed price at which the owner of the option can buy, or sell, the underlying security or commodity.
Step by Step Answer:
a In order to solve a problem using the twostate option model we first need to draw a stock price tree containing both the current stock price and the stocks possible values at the time of the options ...View the full answer
Corporate Finance
ISBN: 978-1259918940
12th edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford Jordan
