Question: A Long term Equity AnticiPation Security LEAPS to buy stock at

A Long-term Equity AnticiPation Security (LEAPS) to buy stock at $25 expires after one year and currently sells for $4. The underlying stock is selling for $26.
a. What is the intrinsic value and the time premium paid for the LEAPS?
b. What will be the value of this LEAPS if the price of the stock at the expiration of the LEAPS is $20? $25? $30? $40?
c. If the price of the stock is $45 at the expiration of the LEAPS, what is the percentage return that is earned by an investor in the stock and an investor in the LEAPS? Why does the option in this problem illustrate the successful use of financial leverage?

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  • CreatedMarch 19, 2015
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