The price of Build A Fire Corp. stock will be either $54 or $87 at the end of th

Question

The price of Build A Fire Corp. stock will be either $54 or $87 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 2 percent.

Suppose the current price of the company's stock is $63. What is the value of the call option if the exercise price is $50 per share? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Suppose the exercise price is $80 and the current price of the company's stock is $63. What is the value of the call option now? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

The price of Build A Fire Corp. stock will be either $54 or $87 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 2 percent.

Explanation / Answer

Part A

The value of the call is the stock price minus the present value of the strike (exercise price), so:

C0 = $63 - $50/1.02

C0 = $13.98

Part B

The value of the call is:

$63 = 2C0+ $54/1.02

C0= $5.03

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