The stock of Alpha Corp. currently sells for $54 per share. Apple Hedge Fund believes that Alpha's
Question:
The stock of Alpha Corp. currently sells for $54 per share. Apple Hedge Fund believes that Alpha's stock could increase substantially in price over the next 3 months. A Call option with an exercise (strike) price of $55 which matures in 3 months has a current price of $3 per share. Assume that the option would not be exercised until maturity. The table below presents possible share prices at the maturity of the option. Under each possible final price for the stock, determine:
a) Would the Call option be exercised?
The call option will not be exercised until the stock is greater than the exercise price.
b) What would be the net gain or loss from the option (including the initial price of the option)?
c) What would be the percentage gain or loss from the option relative to the initial investment in the option?
Fundamentals of Corporate Finance
ISBN: 978-0077861704
11th edition
Authors: Stephen Ross, Randolph Westerfield, Bradford Jordan