Question

Suppose a share of stock sells for $58. The risk-free rate is 7 percent, and the stock price in one year will be either $64 or $74.

  

a.	What is the value of a call option with an exercise price of $64? (Leave no cells blank - be certain to enter "0" wherever required.)
b.	Calculate the minimum return on the stock required to get the option in the money. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

Hello Sir/ Mam

Given that:

Share current;y sells at $58.

(a) Value = 0

Value of call option with an exercise price of $64 = 0

As the exercise price is more than the current share price, hence the call is out of the money. Hence, Intrinsic Value of call = 0

(b) Minimum return = 10.34%

The option will be in the money as and when the share price is greater than 64.

Hence, we should have a return of atleast $6.

Hence,

I hope this solves your doubt.

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