b) However if the market price of google goes to $110, i could, and probably wou
ID: 2811784 • Letter: B
Question
b) However if the market price of google goes to $110, i could, and probably would use my right to buy at 105, sell at 110 and pocket the difference. This type of instrument is called an 'option' as I, the owner, have the option to use or not use my right of ownership. Based on the price. Lets use the simple risk model we discussed in class. Ie, there is a 50/50 chance of one of two outcomes happening. Specifically, there is a 50% chance Google will go to $110, and a 50% chance it will go to $90
If over time the price of google went to 105. And there was 50/50 chance of price going in the future to 95 or 115, how much would you expect your call option (at 105) to sell for?
Explanation / Answer
Hello Sir/ Mam
YOUR REQUIRED ANSWER IS $0.
The option will sell to support the no-arbitrage theory(no riskless profit can be made) through a combination of using the expected stock price and the option's strike price ($ 105 here).
Strike Price = $105
As the strike price is equal to the expected price, the call is expected to be at the money.
Hence, its market price will be zero.
I hope this solves your doubt.
Feel free to comment if you still have any query.
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Price Probability Expected 95 50% 47.5 115 50% 57.5 Total $105Related Questions
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