The price of MDD, Inc., stock will be either $67 or $89 at the end of the year.
ID: 2762119 • Letter: T
Question
The price of MDD, Inc., stock will be either $67 or $89 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 4 percent.
Suppose the current price of MDD stock is $78. What is the value of the call option if the exercise price is $63 per share? (Round your answer to 2 decimal places. (e.g., 32.16))
Suppose the current price of MDD stock is $78. What is the value of the call option if the exercise price is $73 per share? (Round your answer to 2 decimal places. (e.g., 32.16))
The price of MDD, Inc., stock will be either $67 or $89 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 4 percent.
Explanation / Answer
Answer :-
a.) current price = $78
exersice price = $63
Interest rate(r) = 4%
Years(t) = 1 year
Call Value = Current price - Exercise price / (1 + r)t
= 78 - 63 / (1+.04)1
= 78 - 60.58
= $ 17.42
b.) current price = $78
exersice price = $73
Interest rate(r) = 4%
Years(t) = 1 year
Call Value = Current price - Exercise price / (1 + r)t
= 78 - 73 / (1+.04)1
= 78 - 70.19
= $ 7.81
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