A particular call is the option to buy stock at $25. It expires in six months an

Question

A particular call is the option to buy stock at $25. It expires in six months and currently sells for $3 when the price of the stock is $27.

a. What is the intrinsic value of the call? Round your answer to the nearest dollar. $

What is the time premium paid for the call? Round your answer to the nearest dollar. $

b. What will the value of this call be after six months if the price of the stock is $20, $25, $30, $40? Round your answer to the nearest dollar.

Price of the stock                Value of the call at expiration

$20                       ?

$ 25                      ?

$30                        ?

$40                       ?

c. If the price of the stock rises to $40 at the expiration date of the call, what is the percentage increase in the value of the call? Round your answer to one decimal places. %

d. If an individual buys the stock and sells this call, what is the cash outflow (i.e., net cost)? Round your answer to the nearest dollar. $

What will the profit on the position be after six months if the price of the stock is $10__?, $15__?, $20__?, $25__?, $27__?, $30__?, $40__? Round your answer to the nearest dollar.

e. If an individual sells this call naked, what will the profit or loss be on the position after six months if the price of the stock is $25__?, $27__?, $40__? Round your answer to the nearest dollar.

Explanation / Answer

Solution 1;

The intrinsic value of the call is the difference between the strike price and the market price of the stock if it is in the money since it is in the money hence the intrinsic value of call = $27 - $25 = $ 2

The value of the call if the stock is 20 then the intrinsic value will be zero because it will be out of the money

at 25 again the intrinsic value would be zero

at 30 it is in the money hence the value of the stock will be 30 - 25 = $ 5

at 40 it would be 40 -25 = 15

Solution c:

The percentage increase will be (15 - 3 )/ 3

= 12/3*100 = 400%

solution d:

Profit on position after six months will be

@ 10 - loss of premium

@ 15 ,20 ,,25 again the loss of premium amount

at 27 @ = 2-3 = -1 will be loss

at 30 = 5- 3 = 2 profit

at 40 = 15-3 = 12 profit

Thnak you.

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