You currently own a one-year call option on Mayer Industries stock. The current stock price is $37.18 and the risk-free rate of return is 4.5 percent. Your option has a strike price of $32.50 and you assume that it will finish in the money. What is the current value of your call option?
A) $4.49
B) $4.68
C) $4.89
D) $5.82
E) $6.08

Question

Quizplus · Accepted Answer

The intrinsic value of a call option is the current stock price minus the strike price, which is $37.18 - $32.50 = $4.68. However, since the option is assumed to finish in the money, we need to consider the present value of the strike price. The present value of the strike price is $32.50 / (1 + 0.045) = $31.10. The current value of the call option is then $37.18 - $31.10 = $6.08.

You Currently Own a One-Year Call Option on Mayer Industries