You have taken a long position in a call option on IBM common stock. The option has
Question:
a. How much of the option premium is due to intrinsic value versus time value?
b. What is your net profit on the option if IBM’s stock price increases to $ 190 at expiration of the option and you exercise the option?
c. What is your net profit if IBM’s stock price decreases to $ 170?
Step by Step Answer:
a The intrinsic value of the option is 4 180 176 Thus the tim...View the full answer
Financial Markets and Institutions
ISBN: 978-0077861667
6th edition
Authors: Anthony Saunders, Marcia Cornett
Related Video
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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