A call option is written on a stock whose current price is $50. The option has maturity
Question:
A call option is written on a stock whose current price is $50. The option has maturity of 3 years, and during this time the annual stock price is expected to increase by 25% or to decrease by − 10%. The annual interest rate is constant at 6%. The option is exercisable at date 1 at a price of $55, at date 2 for a price of $60, and at date 3 for a price of $65. What is its value today? Will you ever exercise the option early?
Step by Step Answer:
The value of the call option today is the present value of the expected ...View the full answer
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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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