Kate is interested in buying a European call option written on EastJet Airlines Ltd., a nondividend paying
Question:
Kate is interested in buying a European call option written on EastJet Airlines Ltd., a non–dividend paying common stock, with a strike price of $75 and one year until expiration. Currently EastJet’s stock sells for $78 per share. In one year Kate knows that EastJet’s stock will be trading at either $93 per share or $65 per share. Kate can borrow and lend at the risk-free equivalent annual rate (EAR) of 2.5 percent.
a. What should the call option sell for today?
b. If no options currently trade on the stock, is there a way to create a synthetic call option with identical payoffs to the call option just described? If there is, how would you do it?
c. How much does the synthetic call option cost? Is this greater than, less than, or equal to what the actual call option costs? Does this make sense?
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:
a In order to solve a problem using the twostate option model we first need to draw a stock price tree containing both the current stock price and the stocks possible values at the time of the options ...View the full answer
Corporate Finance
ISBN: 978-0071339575
7th Canadian Edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Gordon Ro
