This is FIN 754 Derivatives: View the following data: All options are on the cam

Question

This is FIN 754 Derivatives:

View the following data: All options are on the came stock

S = 40

Call Option I               Call Option II             Call Option III

X =                         35                                40                                 40

T =                         .25                               .15                                .25

Rank the options by price and estimate the price of each option

Rank the options by speculative (time) value.

View the following data: S = 50 X = 50 P = 3.00 Call = 3.50

You think that the stock will fall to 40 over the life of the options. Should you invest in the Call option or the Put option? Now say the stock actually fell to $44. Analyze your results.

Explanation / Answer

Value of an option contract = Intrinsic value + Time value

                                                       = (S- X) +T

Option I = (40-35) +0.25

                =5.25

Option II = (40-40) +0.15

                = 0.15

Option III = (40-40) +0.25

                = 0.25

On the basis of price (low to high) Ranking would be: Option II, option III, Option I.

Ranking based on the time value (low to high) would be: Option II, option III, Option I.

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