The following table presents the data on ABC Corp.'s call options at different stock prices. Based on your understanding of exercise value and option prices, complete the table with a strike price of $16.00: Stock Price ($) Strike Price ($) Exercise Value ($) Market Price of Option ($) Time Value ($) 24.00 16.00 8.00 9.56 48.00 16.00 34.10 60.00 16.00 46.40 66.00 72.00 16.00 16.00 50.00 52.60 60.00 2.10 2.40 4.00 After two weeks, the stock price of ABC Corp. increases to $75.60. Suppose you purchased the shares for $48.00 and then sell the shares at $75.60; your rate of return will be on that transaction. After your analysis, you decided to purchase the option for $34.10, which gives you the right to buy ABC Corp.'s stock at $16.00. If you exercise the option by purchasing the stock at the strike price, you could immediately sell the share of the stock at its market price of $75.60. This will result in a payoff, and the rate of return on your option will be Answer the following questions, based on your understanding of options, option price, and exercise value. • True or False: Your friend thinks that the stock price of KnowItAll Corp. will decline. He decides to write and sell an option without buying the stock. He says that he will buy the stock when his option buyer exercises the option. This is an example of a naked option. • True or False: When you buy a put option, you are obliged to sell the underlying asset at the strike price by the expiration date. • True or False: LEAPS usually have maturities up to three years, unlike regular options that usually expire in six months.
The following table presents the data on ABC Corp.'s call options at different stock prices. Based on your understanding of exercise value and option prices, complete the table with a strike price of $16.00: Stock Price ($) Strike Price ($) Exercise Value ($) Market Price of Option ($) Time Value ($) 24.00 16.00 8.00 9.56 48.00 16.00 34.10 60.00 16.00 46.40 66.00 72.00 16.00 16.00 50.00 52.60 60.00 2.10 2.40 4.00 After two weeks, the stock price of ABC Corp. increases to $75.60. Suppose you purchased the shares for $48.00 and then sell the shares at $75.60; your rate of return will be on that transaction. After your analysis, you decided to purchase the option for $34.10, which gives you the right to buy ABC Corp.'s stock at $16.00. If you exercise the option by purchasing the stock at the strike price, you could immediately sell the share of the stock at its market price of $75.60. This will result in a payoff, and the rate of return on your option will be Answer the following questions, based on your understanding of options, option price, and exercise value. • True or False: Your friend thinks that the stock price of KnowItAll Corp. will decline. He decides to write and sell an option without buying the stock. He says that he will buy the stock when his option buyer exercises the option. This is an example of a naked option. • True or False: When you buy a put option, you are obliged to sell the underlying asset at the strike price by the expiration date. • True or False: LEAPS usually have maturities up to three years, unlike regular options that usually expire in six months.
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter5: Financial Options
Section: Chapter Questions
Problem 3Q
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Transcribed Image Text:The following table presents the data on ABC Corp.'s call options at different stock prices. Based on your understanding of exercise value and option
prices, complete the table with a strike price of $16.00:
Stock Price ($) Strike Price ($) Exercise Value ($)
24.00
16.00
8.00
16.00
16.00
16.00
16.00
48.00
60.00
66.00
72.00
50.00
Market Price of Option ($)
9.56
34.10
46.40
52.60
60.00
Time Value ($)
2.10
2.40
4.00
After two weeks, the stock price of ABC Corp. increases to $75.60. Suppose you purchased the shares for $48.00 and then sell the shares at $75.60;
your rate of return will be
on that transaction.
After your analysis, you decided to purchase the option for $34.10, which gives you the right to buy ABC Corp.'s stock at $16.00. If you exercise the
option by purchasing the stock at the strike price, you could immediately sell the share of the stock at its market price of $75.60. This will result in a
payoff, and the rate of return on your option will be
Answer the following questions, based on your understanding of options, option price, and exercise value.
• True or False: Your friend thinks that the stock price of KnowItAll Corp. will decline. He decides to write and sell an option without buying the stock.
He says that he will buy the stock when his option buyer exercises the option. This is an example of a naked option.
• True or False: When you buy a put option, you are obliged to sell the underlying asset at the strike price by the expiration date.
• True or False: LEAPS usually have maturities up to three years, unlike regular options that usually expire in six months.
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