Question

The price of Swearengen, Inc., stock will be either $81 or $103 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 7 percent.

  

a.	Suppose the current price of the company's stock is $92. What is the value of the call option if the exercise price is $77 per share? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  

Call value

$

  

b.	Suppose the current price of the company's stock is $92. What is the value of the call option if the exercise price is $87 per share? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  

Call value

$

Answer 1

a.
Suppose the current price of the company's stock is $92. What is the value of the call option if the exercise price is $77 per share? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Call value = stock price - present value of the strike (exercise price)
Call value = $92 -$77/(1.07)	$20.04
b.
Suppose the current price of the company's stock is $92. What is the value of the call option if the exercise price is $87 per share? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Delta = Swing of the Call/Swing of the Stock = [$11 - $0]/[$103 - $81]	1/2
If we purchase ½ of the stock we get either $40.5 [$81 x ½] or $51.5 [$103 x ½]worth of value which is exactly. Therefore the amount to borrowed = $40.5/1.07	37.85
Value of the Call = Stock Price x Delta – Amount Borrowed
Value of the Call = $87 x 1/2 - 37.85	$5.65