Question

In: Finance

You are a trader and you are enticed by shares of BB that currently cost $52....

You are a trader and you are enticed by shares of BB that currently cost $52. There are two choices you can do, either you buy the BB shares at $52 or do the alternative and purchase European call options on BB shares. The premium on the option for BB shares is five dollars the time before the contract expires is 3 months and the exercise price of the contract is fifty dollars. The volatility is thirty percent per annum, the risk-free rate is twelve percent per annum. Also, there is no dividend being paid from the BB shares.

Solutions

Expert Solution

Buy call option as it is underpriced. Intrinsic value is 5.06 hence it is selling cheap at 5


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