A stock with a current price of $78 has a call option available with a strike price
Question:
A stock with a current price of $78 has a call option available with a strike price of $80. The stock will move up by a factor of .95 or down by a factor of .80 each period for the next two periods and the risk-free rate is 3.5 percent. What is the price of the call option today?
Strike PriceIn finance, the strike price of an option is the fixed price at which the owner of the option can buy, or sell, the underlying security or commodity.
Step by Step Answer:
Given Data Current stock price 7800 Exercise price 8000 Riskfree rate 350 Up ...View the full answer
Fundamentals of Investments Valuation and Management
ISBN: 978-0078115660
7th edition
Authors: Bradford Jordan, Thomas Miller
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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