menu
bartleby
search
close search
Hit Return to see all results

Let C be the price of a call option to purchase a security whose present price is S.  Explain why C is less than or equal to S.  I'm just thinking it wouldn't make financial sense to pay more for the call option than the present price of the security.  I'm not sure if there is more of an explanation that is needed.  I was also wondering is there any time when it would be favorable to pay more for the call option than the present price of the security?

Question

Let C be the price of a call option to purchase a security whose present price is S.  Explain why C is less than or equal to S.  

I'm just thinking it wouldn't make financial sense to pay more for the call option than the present price of the security.  I'm not sure if there is more of an explanation that is needed.  I was also wondering is there any time when it would be favorable to pay more for the call option than the present price of the security?

check_circleAnswer
Step 1

Options are derivative contracts and the amount that we pay to buy an option is called premium.

Step 2

When we buy or sell options, we enter into the contracts and pay only the premium.

Step 3

Here, we are not buying the underlying security. So, option premium...

Want to see the full answer?

See Solution

Check out a sample Q&A here.

Want to see this answer and more?

Our solutions are written by experts, many with advanced degrees, and available 24/7

See Solution
Tagged in

Business

Finance

Financial Derivatives

Related Finance Q&A

Find answers to questions asked by student like you

Show more Q&A add
question_answer

Q: You are serving on a jury. A plaintiff is suing the city for injuries sustained after a freak street...

A: Calculation of size of settlement:We have both the cash flows that is which occurs today and which o...

question_answer

Q: A company has just raised $6 million by issuing 4000 12-year 11% bond at par. It's predicted that th...

A: Current characterisitics of the bond:Time to maturity = 12-yearsCoupon = 11% bondPriced at par

question_answer

Q: What is the future value in 12 years of $1,000 payments received at the beginning of each year for t...

A: As a first step, let's gather all the information that question has to offer.Annuity investment = A ...

question_answer

Q: What is the annual percentage yield (APY) for money invested at an annual rate of 5% compounded cont...

A: Annual Percentage Yield (APY):APY is an effective annual return rate that takes compounding interest...

question_answer

Q: Heidi owns 680 shares of Boyd Enterprises, which is priced at $65.44 per share. The company plans a ...

A: Number of stocks prior to stock split, Npre = 680Proposed stock split: 6 for 5 that is a shareholder...

question_answer

Q: Bill Clinton reportedly was paid $10 million to write his book My Life. Suppose the book took three ...

A: All financials below are in $ mn.Part (a)Speaking fees, F = 8 per year for N = 3 yearscost of capita...

question_answer

Q: A 25-year annuity was purchased with $225,000 that had accumulated in a RRSP.  The annuity provides ...

A: This question is based solved using Excel functions:PMT: Tells us monthly mortgage payment on a loan...

question_answer

Q: Two bonds, bond A and bond B, are identical except that bond A is convertible and bond B is not. Whi...

A: A convertible bond has an option to convert into equity shares of the company, built into the bond. ...

question_answer

Q: 3. Finding the interest rate and the number of years Aa Aa E The future value and present value equa...

A: Calculating the implied interest rate the investor will earn on the security by using the formula of...

Sorry about that. What wasn’t helpful?