T-bills currently yield 4.3 percent. Stock in Deadwood Manufacturing is currentl
ID: 2793762 • Letter: T
Question
T-bills currently yield 4.3 percent. Stock in Deadwood Manufacturing is currently selling for $80 per share. There is no possibility that the stock will be worth less than $73 per share in one year.
What is the value of a call option with a $64 exercise price? (Round your answer to 2 decimal places, e.g., 32.16.)
What is the value of a call option with a $54 exercise price? (Round your answer to 2 decimal places, e.g., 32.16.)
T-bills currently yield 4.3 percent. Stock in Deadwood Manufacturing is currently selling for $80 per share. There is no possibility that the stock will be worth less than $73 per share in one year.
Explanation / Answer
(a-1). Value of Call Option = Spot Price of underlying - PV of Exercised Price
= $80 - $64/(1+.043) = $18.64
(a-2). Intrinsic Value = Spot Price of underlying - Exercised Price
= $80 - $64 = $16
(b-1). Value of Call Option = Spot Price of underlying - PV of Exercised Price
= $80-$54/1.043 = $28.23
(b-2). Intrinsic Value = Spot Price of underlying - Exercised Price
= $80-$54 = $26
(c-1). Value of Put Option = PV of Exercised Price-Spot Price of underlying = $64/1.043 - $80
=$61.36 - $80 = -ve value i.e Zero
(c-2). Put Intrinsic Value = Exercised Price-Spot Price of underlying
= $64-$80 = -ve value i.e. Zero
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