Chapter 20, Problem 20P

a)

Summary Introduction

To determine: The maximum price of call option of AM Company’s stock.

Introduction:

An 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 is referred to as a call option
• An option that sells an asset is called a put option

b)

Summary Introduction

To determine: The maximum price of a put option of AM Company’s stock.

Introduction:

Put option is a contract that is made by two investors to sell or buy an underlying asset. This option is constructed to mitigate the downside risk of an underlying asset.

c)

Summary Introduction

To determine: The minimum price of call option of AM Company’s stock

Introduction:

Intrinsic value is the extra value given by the option price from the value of an underlying asset.  The intrinsic value of a call-option is the value derived from deducting the underlying price (present stock price) from a strike price.

d)

Summary Introduction

To determine: The minimum price of a put option of AM Company’s stock

Introduction:

Intrinsic value of a put-option is the value derived from deducting a strike price from an underlying price (present stock price).