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the price of chive corporation stock will be either $65 or $85 at the end of the year. call options are available with one year to expiration. t-bills currently yield 6 percent. suppose the current price
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the price of chive corporation stock will be either $65 or $85 at the end of the year. call options are available with one year to expiration. t-bills currently yield 6 percent. suppose the current price of the company's stock is $70. what is the value of the call option if the exercise price is $60 per share?

User Luke Dupin
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18 votes
18 votes

Answer: Theoretical value of call option = 70 – 56.51= 13.49

Intrinsic value = current market price – Exercise price

Intrinsic value = 70-60=10

Explanation: Interest rate =6%

Term =1year

Strike [Exercise] price =$60

Theoretical value of call option =current market price – PV of Exercise price

Current market price=$70

PV of Exercise price = 60 x e-6

PV of Exercise price = 60 x e-0.06

Value of e = 2.7183

So, e0.06= 1.061844

e-0.06= 1/ 1.061844= 0.941758

PV of Exercise price = 60 x 0.941758 = 56.51

User Bjfletcher
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