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The current price of a stock is $28. In 1 year, the price will be either $35

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The current price of a stock is $28. In 1 year, the price will be either $35 or $23. The annual risk-free rate is 5%. Find the price of a call option on the stock that has a strike price of $30 and that expires in 1 year.

Strike Price
In finance, the strike price of an option is the fixed price at which the owner of the option can buy, or sell, the underlying security or commodity.
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The stocks range of payoffs in one year is 35 23 12 At expirati...View the full answer


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Financial Management Theory And Practice

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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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