T-bills currently yield 5.0 percent. Stock in Deadwood Manufacturing is currentl

Question

T-bills currently yield 5.0 percent. Stock in Deadwood Manufacturing is currently selling for $87 per share. There is no possibility that the stock will be worth less than $80 per share in one year.

What is the value of a call option with a $76 exercise price? (Round your answer to 2 decimal places, e.g., 32.16.)

What is the value of a call option with a $68 exercise price? (Round your answer to 2 decimal places, e.g., 32.16.)

T-bills currently yield 5.0 percent. Stock in Deadwood Manufacturing is currently selling for $87 per share. There is no possibility that the stock will be worth less than $80 per share in one year.

Explanation / Answer

a-1) The value of the call is the stock price minus the present value of the exercise price,

so: C0= $87 – [$76/1.05] = $14.62

a-2) The intrinsic value is the amount by which the stock price exceeds the exercise price of the call, so the intrinsicvalue is $11 (87-76).

b-1) The value of the call is the stock price minus the present value of the exercise price,

so: C0= $87 – [$68/1.05] = $22.24

b-2) The intrinsic value is the amount by which the stock price exceeds the exercise price of the call, so the intrinsic value is $ 19.

c-1) The value of the put option is $0 since there is no possibility that the put will finish in the money.

c-2) The intrinsic value is also $0

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