P.27.1 An investor has purchased a 4-month call option on the equity share of Birla company for Rs 5. It has a present market price per share of Rs 112, exercise price of Rs 120. At the end of 4 months, the investor expects the price of share to be in the following range of Rs 90 to 170 with varying probabilities.

Expecte price

Probability

Rs 100

0.10

Rs 110

0.25

From the above, you are required to answer the following:

Rs 125

0.30

Rs 150

0.25

Rs 170

0.10

1. What is the expected value of share price 4-months hence? What is the value of call option at its expiration (G) if the expected value of share price prevails at the end of 4 months?

2. Determine the expected value of option price at maturity, assuming that the call time. Why does it differ from the option value determined in part (0?hom so wie

option is held to this

3. What is the theoretical value of the option, at the beginning of 4-month period? Give comments on the market value of the call option in relation to its theoretical value. bound p