Question

T-bills currently yield 3.8 percent. Stock in Danotos Manufacturing is currently selling for $75 per share. There is no possibility that the stock will be worth less than $68 per share in one year.

a-1.	What is the value of a call option with a $59 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 $42 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 $59 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

a-1 : The value of the call option is :

= stock price - exercise price/1.038

= $75 - $59/1.038

= $18.16

a-2 : the intrinsic value is ;

=Stock price - exercise price

=$75 - $59

=$16

b- 1: Value of the call option:

$75 - $42/1.038

= $34.54

Intrinsic value :

= $75 - $42

=$33

c-1 : The put option can only be exercise of the stock price is below the exercise price, the stock price is higher than the exercise price so, the value of the put option is 0. Since, there is no possibility that the put will finish in the money as the stock price is above the exercise price.

c-2 :The put option can only be exercise of the stock price is below the exercise price, the stock price is higher than the exercise price so, the intrinsic value of the put option is 0. Since ,there is no possibility that the put will finish in the money as the stock price is above the exercise price.