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Consider three European call options written on the same stock which is currently selling for $100 per share. The table below reports the strike prices,
Consider three European call options written on the same stock which is currently selling for $100 per share. The table below reports the strike prices, market prices, and the time to maturity for each option. Assume that the transaction cost of buying and selling either option is zero. Finally, assume that call options A and C are fairly valued and we are trying to determine whether call option B is fairly valued or not. Strike Market Time to Option Price Price Maturity Call Option $100 $5 1 year Call Option $110 $3 1 year B Call Option $120 $1 1 year Which of the following claim regarding the value of Call Option B is correct? Call Option B is overvalued. It is impossible to determine anything about the value of Call Option B relative value of the other two call options. Call Option B is fairly valued. Call Option B is undervalued
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