Chapter 18, Problem 2P

### Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

Chapter
Section

### Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

# OPTIONS The exercise price on one of Boudreaux Company's call options is $14, its exercise value is$20, and its premium is $5. What are the option's market value and the stock's current price? Summary Introduction To determine: The current price of the stock and market value of the 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. Explanation Given information: B Company has a call option stock with an exercise price of$14 and its exercise value is $20. The premium is$5.

The formula to compute the market price of option using premium formula is as follows:

PremiumĀ Ā =MarketĀ priceĀ ofĀ optionāExerciseĀ value

The formula to compute the current stock price of option using exercise value formula is as follows:

ExerciseĀ valueĀ =CurrentĀ stockĀ priceāExerciseĀ price

Compute the current stock price of option:

ExerciseĀ valueĀ =CurrentĀ stockĀ priceāExerciseĀ price$20=CurrentĀ stockĀ priceā$14

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