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a. Circular File stock is selling for $25 a share. You see that call options on the

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a. Circular File stock is selling for $25 a share. You see that call options on the stock with exercise price of $20 are selling at $3. What should you do? What will happen to the option price as investor identify this opportunity?

b. Now you observe that put options on Circular File with exercise price $30 are selling for $4. What should you do?

Selling price of stock............................$25.00

Call option price ................................. $3.00

Exercise price for call option...................$20.00

Put option price...................................$4.00

Exercise price for put option...................$30.00

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Related Book For  answer-question
Fundamentals of Corporate Finance

Fundamentals of Corporate Finance

ISBN: 978-0078034640

7th edition

Authors: Richard Brealey, Stewart Myers, Alan Marcus

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Stocks (also known as equities) are securities that represent ownership in a company. They are issued by companies to raise capital, and when an individual buys stocks, they become a shareholder in that company. Investing in stocks can be a way for individuals to potentially earn a return on their investment through dividends and capital appreciation. However, investing in stocks also carries a level of risk, as the value of the stock can fluctuate based on various factors such as the financial performance of the company and general market conditions. For companies, issuing stocks can be a way to raise funds for growth and expansion. When a company goes public by issuing an initial public offering (IPO), it can raise significant capital by selling ownership stakes to the public. Companies can also issue additional stock offerings to raise additional capital as needed.

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