Question

T-bills currently yield 4.1 percent. Stock in Danotos Manufacturing is currently selling for $78 per share. There is no possibility that the stock will be worth less than $71 per share in one year. a-1. What is the value of a call option with a $68 exercise price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

a-2. What is the intrinsic value? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

b-1. What is the value of a call option with a $50 exercise price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

b-2. What is the intrinsic value? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

c-1. What is the value of a put option with a $68 exercise price? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

c-2. What is the intrinsic value? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

Answer 1

Solution :-

( A- 1 )

Value of Call Option = Stock Price - PV of Exercise Price

= $78 - $68 / (1 + 0.041) = $78 - $65.32 = $12.68

(A - 2)

Intrinsic Value = Stock Price - Excercise Price

= $78 - $68 = $10

(B - 1)

Value of Call Option = Stock Price - PV of Exercise Price

= $78 - $50/ (1 + 0.041) = $78 - $48.03 = $29.97

(B - 2)

Intrinsic Value = Stock Price - Excercise Price

= $78 - $50 = $18

(C - 1 )

Value of Put Option = Nil

As Stock Price is Greater than Exercise Price

(C- 2)

Intrinsic Value = Max [ ( EP - SP ) , 0 ]

= Max [ ( $68 - $78 ) , 0 ]

= 0

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