Question

The common stock of Mercury Motors is selling for $28.97 a share while one-year U.S. Treasury securities are currently yielding 2.8 percent. What is the current value per share of a one-year call option on Mercury Motors stock if the exercise price is $22.50 and you assume the option will finish in the money

Answer 1

$7.08

Step-by-step explanation:

In short, Value of Call option = Stock Price - Strike Price

Current Value of Strike price = 22.50 * (1+2.8%)^-1

Current Value of Strike price = 22.50 * (1.028)^-1

Current Value of Strike price = 22.50 * 0.9727626459143969

Current Value of Strike price = 21.88715953307393

Current Value of Strike price = $21.89

Current Value of Stock = $28.97

Thus, Value of Call option = $28.97 - $21.89

Value of Call option = $7.08