The price of Time Squared Corp. stock will be either $65 or $85 at the end of th

Question

The price of Time Squared Corp. stock will be either $65 or $85 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 6 percent.

Suppose the current price of Time Squared stock is $70. The value of the call option is $
if the exercise price is $60 per share.

The price of Time Squared Corp. stock will be either $65 or $85 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 6 percent.

a.

Suppose the current price of Time Squared stock is $70. The value of the call option is $
if the exercise price is $60 per share.

b. Suppose the exercise price is $80 in part (a). The value of the call option is now $

Explanation / Answer

a)
So = Co + E/(1+Rf)

70 = Co + 60/(1+6%)

value of call option Co = $13.40

b)
delta S/delta C = 85-65/85-80 = 4

70 = 4 * Co + 65/1.06

=>
value of call option Co =   $2.17

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