The exercise price on one of ORNE Corporation's call options is $30 and the price of the underlying stock is $35. The option will expire in 25 days. The option is currently selling for $5.50.

a. Calculate the option's exercise value?

b. What is the value of the premium over and above the exercise value? What does this value represent?

c. Is this an out-of-the money option, at-the-money, or in-the-money? Why?

d. What will happen to the value of the option if the underlying stock price changes to $30? Why?

e. Is this an example of a covered call option or a naked call option? Why?

Question A
The exercise value of an option can be found as:

Max(0, S - K)
where S is the price of the underlying stock and K is the strike price of the option. In this case, S=35 and K=30, so S-K = 5. Since 5 is greater than 0, then the exercise value is $5.00

Question B
Since the option sells for $5.50 and the exercise value is $5.00, then the premium is $0.50. This premium represents the volatility of the stock price and the time left to expiration of the option. Usually ...

Solution Summary

Discussion guides student through how to answer and gives solution with worded reasoning and displayed calculations. 371 words.

Stock Values and Options. 1. The exercise price on a call option is $30 and the price of the underlying stock is $35. ... a. Calculate the option's exercise value? ...

... Substituting different values of standard deviation in the model ... annum implied volatility Gives the value of call ... sigma) 0.49 per annum Exercise Price (E or X ...

... The following table contains historical values for this option at different ... TABLE THAT SHOWS (A) STOCK PRICE, (B) STRIKE PRICE, (C) EXERCISE VALUE, (D) OPTION ...

... The exercise price is the face (F) value of the debt. ... he exercise price is the face (F) value of the debt. The equity holders the option is not exercised. ...

... We will use the binomial tree for valuing the call ... at each node using u and d values Thus, the ... Maximum of (Value of European Option, Exercise Value of option. ...

... Substituting the values d1= 0.005753 =(-0.053274+0.055) / 0.3 d2 ... Answer: Value of call option= $2.3941. ... of a put option with the same exercise price and time to ...

...price, you can exercise the put option and sell the share at the exercise price; thus the value of the position is equal to the exercise price and not the ...

... the appropriate discount rate for valuing the acquisition? ... free cash flows, tax shields, and horizon values: ... typically sell for less than their exercise value. ...

... a. concentrate on book values and ignore market values. ... two shares of stock at an exercise price of $22 a ...Exercise value on 1 share= $2.60 =24.60-22 1 warrant ...

... c) Calculate the exercise value if the price of the stock increases to $42 per share. d) What is the difference between a put option and a call option? ...