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Option Prices and Binomial Model

A. The exercise price on one Flanagan Company's options is $15, its exercise value is $22, and its premium is $5. What are the option's market value and the price of the stock?

The textbook answers are $27 for the market value, and $37 for the stock price.

B. The current price of a stock is $20. In 1 year the price will be either $26 or $16. The annual risk-free rate is 5 percent. Find the price of a call option on the stock that has an exercise price of $21 and that expires in 1 year. (Hint: Use daily compounding.)

The textbook answer is $2.39.


Solution Summary

Answers to 2 questions on Option prices:
1) Calculates Option price and Stock Price given Exercise Value and Premium
2) Calculates Option price using Binomial Model