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2. Consider a particular stock with call and put options. The date is January 12, and the price of the stock is P185. The table below shows the closing prices of four options, two of which expire in February and May and have exercise prices of 175 and 205, respectively. The February options will expire on February 16th, while the May options will expire on October 20th. These specific selections are of the American style. Exercise Price 175 205 February Calls 25.00 18.20 May Calls 33.50 20.22 February Puts 18.00 25.25 May Puts 26.75 32.18 A. Consider the February call. Explain (with supporting calculations) that the option holder has no reason the option right now. When is the purchased justified? B. Explain (with supporting calculations) that, given February call at an exercise price is less likely also to be exercised. C. Suppose that the option buyer has an alternative to purchase May | call instead of February call. Explain why May options are more likely to be exercised than February calls. D. Assume that the option holder is expecting that the price of the stock will fall. Explain why a put option is less likely to be exercised and consider the May put at an exercise price of 205. E. What is the best option for the option holder?

2. Consider a particular stock with call and put options. The date is January 12, and the price of the stock is P185. The table below shows the closing prices of four options, two of which expire in February and May and have exercise prices of 175 and 205, respectively. The February options will expire on February 16th, while the May options will expire on October 20th. These specific selections are of the American style. Exercise Price 175 205 February Calls 25.00 18.20 May Calls 33.50 20.22 February Puts 18.00 25.25 May Puts 26.75 32.18 A. Consider the February call. Explain (with supporting calculations) that the option holder has no reason the option right now. When is the purchased justified? B. Explain (with supporting calculations) that, given February call at an exercise price is less likely also to be exercised. C. Suppose that the option buyer has an alternative to purchase May | call instead of February call. Explain why May options are more likely to be exercised than February calls. D. Assume that the option holder is expecting that the price of the stock will fall. Explain why a put option is less likely to be exercised and consider the May put at an exercise price of 205. E. What is the best option for the option holder?

EBK CONTEMPORARY FINANCIAL MANAGEMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter20: Financing With Derivatives
Section: Chapter Questions
Problem 1P
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2. Consider a particular stock with call and put options. The date is January 12, and the price of the stock is P185. The table below shows the closing prices of four options, two of which expire in February and May and have exercise prices of 175 and 205, respectively. The February options will expire on February 16th, while the May options will expire on October 20th. These specific selections are of the American style. Exercise Price February Calls May Calls February Puts 18.00 May Puts 175 25.00 33.50 26.75 205 18.20 20.22 25.25 32.18 A. Consider the February call. Explain (with supporting calculations) that the option holder has no reason the option right now. When is the purchased justified? B. Explain (with supporting calculations) that, given February call at an exercise price is less likely also to be exercised. C. Suppose that the option buyer has an alternative to purchase May| call instead of February call. Explain why May options are more likely to be exercised than February calls. D. Assume that the option holder is expecting that the price of the stock will fall. Explain why a put option is less likely to be exercised and consider the May put at an exercise price of 205. E. What is the best option for the option holder?
Transcribed Image Text:2. Consider a particular stock with call and put options. The date is January 12, and the price of the stock is P185. The table below shows the closing prices of four options, two of which expire in February and May and have exercise prices of 175 and 205, respectively. The February options will expire on February 16th, while the May options will expire on October 20th. These specific selections are of the American style. Exercise Price February Calls May Calls February Puts 18.00 May Puts 175 25.00 33.50 26.75 205 18.20 20.22 25.25 32.18 A. Consider the February call. Explain (with supporting calculations) that the option holder has no reason the option right now. When is the purchased justified? B. Explain (with supporting calculations) that, given February call at an exercise price is less likely also to be exercised. C. Suppose that the option buyer has an alternative to purchase May| call instead of February call. Explain why May options are more likely to be exercised than February calls. D. Assume that the option holder is expecting that the price of the stock will fall. Explain why a put option is less likely to be exercised and consider the May put at an exercise price of 205. E. What is the best option for the option holder?
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