You currently own a one-year call option on Caspian Way stock. The current stock price is $38.70 and the risk-free rate of return is 3.85 percent. Your option has a strike price of $37.50 and you assume the option will finish in the money. What is the current value of your call option?
A) $1.20
B) $2.59
C) $3.07
D) $5.13
E) $7.27

Question

Quizplus · Accepted Answer

The current value of the call option can be approximated using the intrinsic value, which is the difference between the current stock price and the strike price, since the exact option pricing model (like Black-Scholes) details are not provided. The intrinsic value is $38.70 - $37.50 = $1.20. However, this does not account for the time value of money. Given the option is expected to finish in the money and considering the risk-free rate, the actual value would be higher than just the intrinsic value. Among the provided options, $2.59 is the only value that is reasonably higher than the intrinsic value, accounting for the time value of money without specific calculations provided.

You Currently Own a One-Year Call Option on Caspian Way