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The price of Swearengen, Inc., stock will be either $75 or $95 at the end of the

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The price of Swearengen, Inc., stock will be either $75 or $95 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 6 percent.
a. Suppose the current price of the company's stock is $85. What is the value of the call option if the exercise price is $65 per share?
b. Suppose the exercise price is $70 in part (a). What is the value of the call option now?
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a The value of the call is the stock price minus the ...View the full answer


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Fundamentals of Corporate Finance

Fundamentals of Corporate Finance

ISBN: 978-0077861704

11th edition

Authors: Stephen Ross, Randolph Westerfield, Bradford Jordan

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A call option is a type of financial contract that gives the holder the right, but not the obligation, to buy an underlying asset (such as a stock, commodity, or currency) at a specified price (called the strike price) within a specified period of time. When an investor purchases a call option, they are essentially betting that the price of the underlying asset will rise above the strike price before the option\'s expiration date. If the price of the asset does rise above the strike price, the investor can exercise the option by buying the asset at the strike price and then selling it at the higher market price, thereby earning a profit. Call options are often used as a speculative investment strategy, as they allow investors to potentially profit from the upward movement of an asset without having to actually own the asset itself. They are also commonly used as a hedging tool to protect against potential losses in a portfolio.

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