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Risk Management: Options

1. A call option on Futura Corporation stock currently trades for $4. The expiration date is February 18 of next year. The exercise price of the option is $45.

a. If this is an American option, on what dates can the option be exercised?
b. If this is a European option, on what dates can the option be exercised?
c. Suppose the current price of Futura Corporation stock is $35. Is this option worthless?

2. The strike price of a call option on Simpsons Entertainment common stock is $50.

a. What is the payoff at expiration of this call if, on the expiration date, Simpsons stock sells for $55?
b. What is the payoff at expiration of this call if, on the expiration date, Simpsons stock sells for $45?

Solution Preview

1. A call option on Futura Corporation stock currently trades for $4. The expiration date is February 18 of next year. The exercise price of the option is $45.

a. If this is an American option, on what dates can the option be exercised?

If this is an American option it can be exercised on any day upto the expiration date i.e. February 18 next year

b. If this is a European option, on what dates can the option be exercised?

If this is an European option it ...

Solution Summary

Answers to questions on payoff at expiration of options, dates the option be exercised.

$2.19