Consider a perpetual call option with S = $50, K = $60, r = 0.06, =
Question:
a. What is the price of the option and at what stock price should it be exercised?
b. Suppose δ = 0.04 with all other inputs the same. What happens to the price and exercise barrier? Why?
c. Suppose r = 0.07 with all other inputs the same. What happens to the price and exercise barrier? Why?
d. Suppose σ = 50% with all other inputs the same. What happens to the price and exercise barrier? Why?
Step by Step Answer:
a The price of the perpetual call option is 2635 It should be exercised when the stock price reaches ...View the full answer
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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