The value derived from exercising an option immediately is the exercise value. No rational investor would...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
The value derived from exercising an option immediately is the exercise value. No rational investor would exercise an option that is out-of-the-money, so the minimum exercise value is zero. The following table provides information regarding options on ABC Corp. stock. Because the stock's price is volatile, investors trade options to either hedge their positions or speculate on price movements. Investors can either buy options or "issue" new options, which is called writing options. The following table presents the data on ABC Corp.'s call options at different stock prices. Based on your understanding of exercise value and option prices, complete the table with a strike price of $24.00: Stock Price ($) Strike Price ($) Exercise Value ($) Market Price of Option ($) Time Value ($) 16.00 24.00 0.00 1.56 32.00 24.00 10.10 2.10 40.00 24.00 18.40 2.40 44.00 24.00 20.00 22.60 48.00 24.00 28.00 4.00 After two weeks, the stock price of ABC Corp. increases to $52.80. Suppose you purchased the shares for $32.00 and then sell the shares at $52.80; your rate of return will be on that transaction. After your analysis, you decided to purchase the option for $10.10, which gives you the right to buy ABC Corp.'s stock at $24.00. If you exercise the option by purchasing the stock at the strike price, you could immediately sell the share of the stock at its market price of $52.80. This will result in a payoff, and the rate of return on your option will be Answer the following questions, based on your understanding of options, option price, and exercise value. True or False: An option's price will always be greater than (or equal to) its exercise value. True or False: When you buy a put option, you are obliged to sell the underlying asset at the strike price by the expiration date. True or False: Options can be created and traded without an underlying asset. The value derived from exercising an option immediately is the exercise value. No rational investor would exercise an option that is out-of-the-money, so the minimum exercise value is zero. The following table provides information regarding options on ABC Corp. stock. Because the stock's price is volatile, investors trade options to either hedge their positions or speculate on price movements. Investors can either buy options or "issue" new options, which is called writing options. The following table presents the data on ABC Corp.'s call options at different stock prices. Based on your understanding of exercise value and option prices, complete the table with a strike price of $24.00: Stock Price ($) Strike Price ($) Exercise Value ($) Market Price of Option ($) Time Value ($) 16.00 24.00 0.00 1.56 32.00 24.00 10.10 2.10 40.00 24.00 18.40 2.40 44.00 24.00 20.00 22.60 48.00 24.00 28.00 4.00 After two weeks, the stock price of ABC Corp. increases to $52.80. Suppose you purchased the shares for $32.00 and then sell the shares at $52.80; your rate of return will be on that transaction. After your analysis, you decided to purchase the option for $10.10, which gives you the right to buy ABC Corp.'s stock at $24.00. If you exercise the option by purchasing the stock at the strike price, you could immediately sell the share of the stock at its market price of $52.80. This will result in a payoff, and the rate of return on your option will be Answer the following questions, based on your understanding of options, option price, and exercise value. True or False: An option's price will always be greater than (or equal to) its exercise value. True or False: When you buy a put option, you are obliged to sell the underlying asset at the strike price by the expiration date. True or False: Options can be created and traded without an underlying asset.
Expert Answer:
Related Book For
Introduction to Management Science A Modeling and Cases Studies Approach with Spreadsheets
ISBN: 978-0078024061
5th edition
Authors: Frederick S. Hillier, Mark S. Hillier
Posted Date:
Students also viewed these finance questions
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
This assignment requires you to complete the 2022 tax reporting for a fictional woman named Anna Smith. Question 1 T1 - step 4 - line 66 This is Anna's taxable income Answer: Question 2 T1 - step...
-
Busta Limited plans to manufacture bar fridges and the following information is applicable: Estimated sales for the year Estimated costs for the year: Variable costs Direct Material Direct Labour...
-
Pam's 2012 income tax liability was $23,000. Her 2013 AGI did not exceed $150,000. On April 2, 2014, Pam, a calendar year taxpayer, files her 2013 individual return, which indicates a $30,000 income...
-
Draw the influence line for the force in member CD, and then determine the maximum force (tension or compression) that can be developed in this member due to a uniform live load of 800 lb/ft which...
-
Using Program13.m, solve Problem 9.13. Data From Problem 9.13:- The data obtained in a two-plane balancing procedure are given in the table below. Determine the magnitude and angular position of the...
-
Yorks outstanding stock consists of 80,000 shares of noncumulative 7.5% preferred stock with a $ 5 par value and also 200,000 shares of common stock with a $ 1 par value. During its first four years...
-
1.A conductor in a train travelling at 4.0 m/s (N) walks across the train at 1.2 m/s (E) to validate a ticket. If the trian car is 4.0m wide, how long does it take the conductor to reach the other...
-
Discuss your family relationships by identifying their type and characteristics and by noting any influence of culture, gender, and/or technology. Discuss in detail, noting interesting...
-
Should the government step in when there is a strike or lockout in professional sports?
-
Indicate whether each of the following statements is true or false by writing T or F in the answer c olumn. The assignment of certain contracts is prohibited by law.
-
In what way are sports unions like craft unions? In what way are they like industrial unions? In what way do they differ from both?
-
Indicate whether each of the following statements is true or false by writing T or F in the answer c olumn. A novation is a special kind of assignment where none of the parties to the contract are...
-
Sue was just hired as the director of the Springfield Public Health Department. She had been an assistant director in a public health agency located in another state. She was excited to take her...
-
A system has four frames. The time of loading, time of last access, and the R(reference) and M (modified) bits for each page are as shown below. The times are in clock ticks: page loaded last ref. R...
-
The following data are supplied for the common stocks of Nikola Corporation, Tesla, Inc. and General Motors: Nikola Corp (NKLA) Tesla Inc. (TSLA) Close Price ($) Close Price ($) 67.53 30.00 40.81...
-
a. Ash decides to allocate $4 million to fund the exhibit. Given the pieces available and the specific requirements from Ash and Celeste, formulate and solve a binary integer programming problem to...
-
The Oak Works is a family-owned business that makes handcrafted dining room tables and chairs. They obtain the oak from a local tree farm, which ships them 2,500 pounds of oak each month. Each table...
-
You are given the following payoff table. a. Assume that your utility function for the payoffs is U(x) (x. Plot the expected utility of each decision alternative versus the value of p on the same...
-
Ludwig and Miller (2007) used a discontinuity in program funding for Head Start to test the impacts on child mortality rates. In the 1960s, the federal government helped 300 of the poorest counties...
-
The standard enthalpy change of combustion of acetylene is \(-1300.48 \mathrm{~kJ}\) at \(298 \mathrm{~K}\) with \(\mathrm{H}_{2} \mathrm{O}\) in the liquid state. Calculate the standard enthalpy of...
-
Which instrument is used to determine the heat of combustion of a fuel?
Study smarter with the SolutionInn App