Question

A call option has an exercise price of $30. The stock price is currently $27 and the appropriate interest rate is 6%. The option expires in exactly one year and the sigma (The return variability of underlying asset expressed as a decimal) is 0.50 or 50%.
At expiration the stock underlying the option is selling for $34.00. What do you do? What is your loss or gain?

Group of answer choices

A. Let the option expire unexercised since the $4.00 gain is less than the price we paid for the option.

B. Exercise the option and make a profit of $4.00 ($34.00 - $30.00).

C. Exercise the option and make a profit of between $2.00 and $4.00.

D. Exercise the option and make a profit of between $0.00 and $2.00.

E. Exercise the option and make a loss of between -$2.00 and $0.00.

Answer 1

E. Exercise the option and make a loss of between -$2.00 and $0.00.

Firstly, calculate the price of Call option. please refer to below spreadsheet for Call price calculated as per Black scholes model :

Cell reference -

Price of Call option = $4.85

Profit or Loss on expiration of Call option :

putting the values :

Thus, Exercise the option and make a loss of between -$2.00 and $0.00.