Audrey is considering an investment in Morgan Communications, whose stock curren
ID: 2697238 • Letter: A
Question
Audrey is considering an investment in Morgan Communications, whose stock currently sells for $61. A put option on Morgan's stock, with an exercise price of $55, has a market value of $3.24. Meanwhile, a call option on the stock with the same exercise price and time to maturity has a market value of $9.97. The market believes that at the expiration of the options the stock price will be either $70 or $50, with equal probability.
a. If the investor bought a put option on the stock? Round your answer to two decimal places.
b. If the investor bought a call option on the stock? Round your answer to two decimal places
c. If the investor bought a put option on the stock? Round your answer to two decimal places.
Explanation / Answer
a. If the investor bought a put option on the stock? Round your answer to two decimal places.
Initial cash outflow = 3.24
Cash inflow at end of option :
if share turn out to be $70 = 0
If share turn out to be $50 = $5
Expected cash inflow at end of option = 0*0.50 + 5 *0.50 = $2.50
Net loss at end of option = 3.24 - 2.50 =$ 0.84
b. If the investor bought a call option on the stock? Round your answer to two decimal places
Initial cash outflow = 9.97
Cash inflow at end of option :
if share turn out to be $70 = 15
If share turn out to be $50 = $0
Expected cash inflow at end of option = 15*0.50 + 0 *0.50 = $7.50
Net loss at end of option = 9.97-7.50 =$ 2.47
c. If the investor bought a put option on the stock? Round your answer to two decimal places.
Initial cash outflow = 3.24
Cash inflow at end of option :
if share turn out to be $70 = 0
If share turn out to be $50 = $5
Expected cash inflow at end of option = 0*0.50 + 5 *0.50 = $2.50
Net loss at end of option = 3.24 - 2.50 =$ 0.84
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