Question

Sally has a call option on one share of Ultra with a strike price of $40 and a call option on one share of Boone with a strike price of $25. George has a call option on a portfolio that has one share of Ultra and one share of Boone. The strike price on George's call option is $65. These options are all expiring today.

a. If Ultra is selling for $50 and Boone for $15, what is the value of Sally's options? What is the value of George's option?

b. If Ultra is selling for $30 and Boone for $35, what is the value of Sally's options? What is the value of George's option?

c. If Ultra is selling for $45 and Boone for $35, what is the value of Sally's options? What is the value of George's option?

Answer 1

Solution :-

Value of Call option = Max [ ( Selling price - Strike Price ) , 0 ]

(i)

In case Value of Ultra is $50 and Value of Boone $15

Value of Sally Option ( Strike Price Ultra = $40 , Bonne = $25 )

Ultra = Max [ ( $50 - $40 ) , 0 ] = $10

Boone = Max [ ( $15 - $25 ) , 0 ] = 0

Value of George Option ( Strike Price = $65 )

Ultra = Max [ ( $50 - $65 ) , 0 ] = $0

Boone = Max [ ( $15 - $65 ) , 0 ] = 0

(ii)

In case Value of Ultra is $30 and Value of Boone $35

Value of Sally Option ( Strike Price Ultra = $40 , Bonne = $25 )

Ultra = Max [ ( $30 - $40 ) , 0 ] = $0

Boone = Max [ ( $35 - $25 ) , 0 ] = $10

Value of George Option ( Strike Price = $65 )

Ultra = Max [ ( $30 - $65 ) , 0 ] = $0

Boone = Max [ ( $35 - $65 ) , 0 ] = 0

(iii)

In case Value of Ultra is $45 and Value of Boone $35

Value of Sally Option ( Strike Price Ultra = $40 , Bonne = $25 )

Ultra = Max [ ( $45 - $40 ) , 0 ] = $5

Boone = Max [ ( $35 - $25 ) , 0 ] = 10

Value of George Option ( Strike Price = $65 )

Ultra = Max [ ( $45 - $65 ) , 0 ] = 0

Boone = Max [ ( $35 - $65 ) , 0 ] = 0

If there is any doubt please ask in comments

Note :- Here in case of George i assume that Strike Price $65 in both shares , As no such clarity

If there is any doubt please ask in comments

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