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Calculating Option (Call and Put) Values

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T-bills currently yield 5.7 percent. Stock in Nina Manufacturing is currently selling for $56 per share. There is no possibility that the stock will be worth less than $49 per share in one year. (Round answers to 2 decimal places. If the answer is zero, input as "0".)

a. The value of a call option with an exercise price of $42 is $________. The intrinsic value is $14.

b. The value of a call option with an exercise price of $30 is $_________ . The intrinsic value is $26.

c. The value of a put option with an exercise price of $42 is $_________. The intrinsic value is $0.

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Solution Preview

T-bills currently yield 5.7 percent. Stock in Nina Manufacturing is currently selling for $56 per share. There is no possibility that the stock will be worth less than $49 per share in one year. (Round answers to 2 decimal places. If the answer is zero, input as "0".)

a. The value of a call option with an exercise price of $42 is $________. The intrinsic value is $14.

A person can buy the call and short the stock.
Amount received on shorting the stock= $56
If this amount is invested at the risk free rate of 5.70%
Amount at the end of 1 year= $59.28 =56 x exp ( 5.7% )
Since there is no possibility that the stock will be worth less than $49 per share in one year, ie the share price at the end of ...

Solution Summary

The value of call an put options are calculated for different exercise prices.

$2.19