You are interested in investing into shares of Omicron Ltd. Presently Omicron is selling for $125 per share. You would buy 100 shares. Alternatively, you may wish to go long call options on Omicron. These call options have an exercise price of $130, expire in 90 days, and cost $10.

A) Why would an option sell for $10, when the exercise price of $130 exceeds the current market price of $125? Explain clearly in one sentence. (2 marks)

B) Calculate the rate of return on Omicron call options if you buy the options at day 0, sell the options on day 90, and the share price is $150 on day 90. (4 marks)

C) Calculate the rate of return on Omicron if you buy the shares at day 0, hold to day 90, and the share price is $100 on day 90. (4 marks)

Answer rating: 100% (QA)

Omicron Investment Decisions A Call Option Premium 10 The call option premium reflects the potential ... View the full answer