The BWS Corporation stock is selling at $50 a share today. a.Calculate the value
ID: 2664653 • Letter: T
Question
The BWS Corporation stock is selling at $50 a share today.a.Calculate the value of a BWS call option if its exercise price is $40 and it expires today.
b.What can you say about the value of a BWS call option is its exercise price is $40 and it expires in six months?
c.Calculate the value of a BWS call option if its exercise price is $60 and it expires today.
d.What can you say about the value of a BWS call option if its exercise price is $60 and it expires in six months?
(please show calculations)
Explanation / Answer
a) If the strike price of the call option is $40 and it expires today, then the owners of "Call option" can "exercise" their options by purchasing the stock at the strike price, which will be cheaper than the prevailing spot rate.
Gain = $50 - $40
= $10
b) If the strike price of the call option is $40 and it expires in 6 months, then it is generally expected that the spot rate has a greater chance of raising high above the strike price if it has a longer period of time to do so. This can be verified by comparing premiums of options for a specified stock and strike prices that has different expiration dates. If the stock value decreases, then the owner should let the call option to expire because exercising the call option at this time will lead to losses. Here the case is “IN the money” as the stock price is greater than the strike price.
c) If the strike price of the call option is $60 and it expires today, then the owners of "Call option cannot "exercise" their options by purchasing the stock at the strike price, which will be higher than the prevailing spot rate.
Loss = $60 - $50
= $10
b) If the strike price of the call option is $60 and it expires in 6 months, then it is generally expected that the spot rate has a greater chance of rising below the strike price if it has a longer period of time to do so. If the stock value decreases, then the owner should exercise the call option because exercising the call option at this time will lead to profits. Here the case is “Out of the money” as the strike price is greater than the stock price.
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