Assume a call option on a particular stock whose current market price is $ 100. The option has a strike price of $100 with an expiry being one year. There are 2 traders, Tom and Jerry who both agree that the stock can either go up to $110 or fall to $90 in one year. They both agree on expected price levels in one year but disagree on the probability of the up and down movements. Tom believes that the probability of the stock going to $100 is 60% while Jerry believes it to be 40%. Based on the above, who would be willing to pay more for the call option and advise on what other advantages he will have over the trader paying less for the call option

Assume a call option on a particular stock whose current market price is $ 100. The option has a strike price of $100 with an expiry being one year. There are 2 traders, Tom and Jerry who both agree that the stock can either go up to $110 or fall to $90 in one year. They both agree on expected price levels in one year but disagree on the probability of the up and down movements. Tom believes that the probability of the stock going to $100 is 60% while Jerry believes it to be 40%. Based on the above, who would be willing to pay more for the call option and advise on what other advantages he will have over the trader paying less for the call option

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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