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You have just purchased a 1-year call option on a stock. The exercise price of the option is $70 and the current stock price is
You have just purchased a 1-year call option on a stock. The exercise price of the option is $70 and the current stock price is $65. The annual risk-free rate of return is 6% Required: (a) Assume that there are only two possible outcomes for the stock price one year from now when the option expires: $90 or $50. Determine the current value of the call option. (4 Marks) (b) Without performing any additional calculations, briefly describe what would happen to the value of the call option in comparison to the value that you calculated above, under each the following independent conditions: (4 Marks) i. The current share price decreases. ii. The time to expiry of the option is six months instead of one year. iii. The risk-free rate increases. iv. The exercise price is $65 instead of $70
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