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An option is the right to buy or sell an asset (stocks, bonds, foreign exchange, land, etc.)

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An option is the right to buy or sell an asset (stocks, bonds, foreign exchange, land, etc.) for a specified price on or before a specific date.
A call option is the right to buy the stock, while a put option is the right to sell the stock. Suppose you have a call option to buy 100 shares in a highly volatile stock,
Fantasia.com, at any time in the next 3 months at $10 per share. Fantasia currently sells at $9 per share.
a. Explain why the value of the option is more than $1 per share.
b. Suppose the option were to expire tomorrow and the price of Fantasia.com had an even chance of rising $5 or falling $5 before then. What would be the value of the option today?
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a You will only exercise the call option if the pric...View the full answer


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Economics

Economics

ISBN: ?978-0073511290

19th edition

Authors: Paul A. Samuelson, William Nordhaus

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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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