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a. In Section 21-3 we calculated the risk (beta) of a six-month call option on Apple stock

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a. In Section 21-3 we calculated the risk (beta) of a six-month call option on Apple stock with an exercise price of $400. Now repeat the exercise for a similar option with an exercise price of $370. Does the risk rise or fall as the exercise price is reduced?

b. Now calculate the risk of a one-year call on Apple stock with an exercise price of $400. Does the risk rise or fall as the maturity of the option lengthens?

Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...
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a The call value has increased since we are more in the money Since we are borrowing 227 bet...View the full answer


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Principles of Corporate Finance

Principles of Corporate Finance

ISBN: 978-0078034763

11th edition

Authors: Richard Brealey, Stewart Myers, Franklin Allen

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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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