Use two-state option pricing model to find the value of a call option and the in
ID: 2653462 • Letter: U
Question
Use two-state option pricing model to find the value of a call option and the intrinsic value given the following parameters:
Exercise Price: $12.00
A)Value of call = $13.44, Intrinsic Value = $13.00
B)Value of call = $13.44, Intrinsic Value = $3.00
C)Value of call = $10.44, Intrinsic Value = $13.00
Please show your work.
T-bills yield: 3.8 pct. Current stock price: $25.00 No possibility stock will be worth less this amount in one year: $22.00Exercise Price: $12.00
A)Value of call = $13.44, Intrinsic Value = $13.00
B)Value of call = $13.44, Intrinsic Value = $3.00
C)Value of call = $10.44, Intrinsic Value = $13.00
Please show your work.
Explanation / Answer
Intrinsic Value = Max{(Current stock price - Exercise Price),0}
Intrinsic Value = MAX{(25-12),0}
Intrinsic Value = $ 13
Extrensic Value = Current stock price - PV of Exercise Price
Extrensic Value = 25 - 12/1.038
Extrensic Value = $ 13.44
Value of call = Max{Extrensic Value,Intrinsic Value}
Value of call = Max{13.44,13}
Value of call = 13.44
Answer
A)Value of call = $13.44, Intrinsic Value = $13.00
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