Ken is interested in buying a European call option written on Southeastern Airlines, Inc., a non-dividend-paying common
Question:
Ken is interested in buying a European call option written on Southeastern Airlines, Inc., a non-dividend-paying common stock, with a strike price of $55 and one year until expiration. Currently, the company’s stock sells for $57 per share. Ken knows that, in one year, the company’s stock will be trading at either $67 per share or $46 per share. Ken is able to borrow and lend at the risk-free EAR of 2.5 percent.
a. What should the call option sell for today?
b. If no options currently trade on the stock, is there a way to create a synthetic call option with identical payoffs to the call option just described? If there is, how would you do it?
Step by Step Answer:
Corporate Finance
ISBN: 9781265533199
13th International Edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe