Question: In July 2010 a call option on Google stock with a January 2011 expiration and exercise price of $460 sold for $42.50. Suppose that by
In July 2010 a call option on Google stock with a January 2011 expiration and exercise price of $460 sold for $42.50. Suppose that by the end of January 2011 the price of Google stock could double to $920 or halve to $230. The rate of interest on a bank loan at this time
a. What would be the value of the Google call in January 2011 if the stock price is $920? If it is $230?
b. Show that a strategy of buying three calls provides exactly the same payoffs as borrowing the present value of $460 from the bank and buying two shares.
c. What is the net cash flow in July 2010 from the policy of borrowing PV($460) and buying two shares?
d. What does this tell you about the value of the call option?
Exercise price .......................... $460.00
Call option price..........................$42.50
Price of Google stock-1................$920.00
Price of Google stock-2................$230.00
Bank loan.................................$460.00
No. of shares can be bought................2.00
No. of calls can be bought...................3.00
Interest rate for 6 months.................1.50%
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Given Data Exercise price 46000 Call option price 4250 Price of Google stock1 9200... View full answer
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