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Some corporations have issued perpetual warrants. Warrants are call options issued by a firm, allowing the warrant-holder

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Some corporations have issued perpetual warrants. Warrants are call options issued by a firm, allowing the warrant-holder to buy the firm’s stock.. For now, just consider a perpetual call.

(a) What does the Black-Scholes formula predict for the value of an infinite-lived call option on a non-dividend paying stock? Explain the value you obtain.

(b) Do you think this prediction is realistic? If not, explain carefully why.

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a As the life of the call option increases the pre...View the full answer


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Related Book For  book-img-for-question
Principles of Corporate Finance

Principles of Corporate Finance

ISBN: 978-0072869460

7th edition

Authors: Richard A. Brealey, Stewart C. Myers

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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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