Arab Banking Company’s common stock has a present market price per share of $29. A 6-month call option has been written on the stock with an exercise price of $31.5. Presently the option has a market value of $3. At the end of 6 months, you estimate the market price of the stock to be $25 per share with a probability of 0.2, $29 with a probability of 0.3, $34 with a probability of 0.3, and $37 with a probability of 0.2. a. What is the expected value of share price 6 months hence? What is the expiration value of the option if that expected value of share price should ? b. What is the expected value of option price at expiration, assuming that the option is held to this time? c. Based on your answer in part b what is the payoff for call option holder and s
Arab Banking Company’s common stock has a present market price per share of $29. A 6-month call option has been written on the stock with an exercise price of $31.5. Presently the option has a market value of $3. At the end of 6 months, you estimate the market price of the stock to be $25 per share with a probability of 0.2, $29 with a probability of 0.3, $34 with a probability of 0.3, and $37 with a probability of 0.2. a. What is the expected value of share price 6 months hence? What is the expiration value of the option if that expected value of share price should ? b. What is the expected value of option price at expiration, assuming that the option is held to this time? c. Based on your answer in part b what is the payoff for call option holder and s
Chapter20: Financing With Derivatives
Section20.A: The Black-scholes Option Pricing Model
Problem 1P
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Arab Banking Company’s common stock has a present market price per share of $29. A 6-month call option has been written on the stock with an exercise price of $31.5. Presently the option has a market value of $3. At the end of 6 months, you estimate the market price of the stock to be $25 per share with a probability of 0.2, $29 with a probability of 0.3, $34 with a probability of 0.3, and $37 with a probability of 0.2.
a. What is the expected value of share price 6 months hence? What is the expiration value of the option if that expected value of share price should ?
b. What is the expected value of option price at expiration, assuming that the option is held to this time?
c. Based on your answer in part b what is the payoff for call option holder and seller?
d. Is the above call option example is a zero sum game? Explain
e. Define put option? why they use it?
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