Question

You expect a stock that currently sells for $28 per share to rise to a least $30 per share during the coming quarter. assume there are 3-month options available on this stock with an exercise price of $29. which of these options should have the most value today?

O European put
O American call
O American and European calls equally
O European call American put

Answer 1

An American call option should be most valuable because it allows for stock purchase before expiry. Profit from stock transactions is calculated by assessing the difference between adjusted selling and purchase prices.

Step-by-step explanation:

Options Valuation:

The American call option should have the most value today because it gives the owner the right to purchase the stock at the exercise price of $29 at any time before expiry. This flexibility to exercise any time adds potential value compared to the European options that can only be exercised at maturity. To determine the profit from each stock transaction, you calculate the difference between the selling price and the purchase price, adjusted for the number of shares and the transaction costs.

For example: Multiply the number of shares purchased by the price per share to get the total purchase cost. Subtract the transaction cost from the result. Multiply the number of shares by the current price to find the total selling price. Subtract the transaction cost for selling from the total selling price. Subtract the adjusted purchase cost from the adjusted selling price to find net profit.