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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

OPTIONS A call option on Bedrock Boulders stock has a market price of $7. The stock sells for $30 a share, and the option has an exercise price of $25 a share

  1. a. What is the exercise value of the call option?
  2. b. What is the premium on the option?

a.

Summary Introduction

To determine: The exercise value of the call option.

Introduction:

Option is a contract to purchase a financial asset from one party and sell it to another party on an agreed price for a future date. There are two types of options, which are as follows:

  • An option that buys an asset called call option
  • An option that sells an asset called put option
Explanation

Given information:

BB Company has a call option stock with a market price of $7 and the company has sold for $30 per share. The option has an exercise price of $25 per share.

The formula to compute the exercise value of call option is as follows:

Exercise value of call option=Current stock priceExercise price

Compute the exerci

b.

Summary Introduction

To determine: The premium on the option.

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