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T-bills currently yield 3.6 percent. Stock in Deadwood Manufacturing is currently selling for $73 per share. There is no possibility that the stock will be worth less than $66 per share in one year. |
| a-1 |
What is the value of a call option with a $50 exercise price? (Round your answer to 2 decimal places, e.g., 32.16.) |
| Call option value | $ |
| a-2 | What is the intrinsic value? |
| Intrinsic value | $ |
| b-1 |
What is the value of a call option with a $48 exercise price? (Round your answer to 2 decimal places, e.g., 32.16.) |
| Call option value | $ |
| b-2 | What is the intrinsic value? |
| Intrinsic value | $ |
| c-1 | What is the value of a put option with a $50 exercise price? |
| Put option value | $ |
| c-2 | What is the intrinsic value? |
| Intrinsic value |
$ |
a)
Calculate the value of the option
Value of the call option = Stock price- present value of the exercise price
=$73-(50/(1+0.036))=24.74
Calculate intrinsic value of the stock
Intrinsic value = stock price – exercise price
=$73-$50=$23
b)
Calculate the value of the option
Value of the call option = Stock price- present value of the exercise price
=$73-(48/(1+0.036))=$26.67
Calculate intrinsic value of the stock
Intrinsic value = stock price – exercise price
=$73-$48=$25
c)
Calculate the value of the option
Value of the put option with the exercise price at $50 is zero, as stock price is greater than that of the exercise price, so the put option is out of money.
The intrinsic value is also zero, because the stock price is greater than that of the exercise price
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