A call option has a stike price/exercise price of $50 per share. The current market price of
Question:
A call option has a stike price/exercise price of $50 per share. The current market price of the underlying stock is $60 per share.
1. Is the call option “in-the money” or “out-of-the-money”?
2. What is the current price of the call option?
3. An investor buys the call option at the current price. If the current market price of the underlying stock goes to $75 per share, how much will this investor either lose or profit? Show your calculations.
Step by Step Answer:
1 Computation of thecall option inthe money or outofthemoney In the Money An in the mo...View the full answer
Introduction To Corporate Finance
ISBN: 9781118300763
3rd Edition
Authors: Laurence Booth, Sean Cleary
Related Video
A call option is a type of financial contract that gives the holder the right, but not the obligation, to buy an underlying asset (such as a stock, commodity, or currency) at a specified price (called the strike price) within a specified period of time. When an investor purchases a call option, they are essentially betting that the price of the underlying asset will rise above the strike price before the option\'s expiration date. If the price of the asset does rise above the strike price, the investor can exercise the option by buying the asset at the strike price and then selling it at the higher market price, thereby earning a profit. Call options are often used as a speculative investment strategy, as they allow investors to potentially profit from the upward movement of an asset without having to actually own the asset itself. They are also commonly used as a hedging tool to protect against potential losses in a portfolio.
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