Underlying stock price: 45.80 You want to purchase one October 45 call contract on Glaxo stock. The option contract will cost you _______________. (Ignore transactions costs.)

Question

Underlying stock price: 45.80  You want to purchase one October 45 call contract on Glaxo stock. The option contract will cost you _______________. (Ignore transactions costs.)

Quizplus · Accepted Answer

A call option gives the buyer the right, but not the obligation, to buy the underlying stock at the strike price before the expiration date. In this case, the strike price is 45 and the underlying stock price is 45.80. So, this option is in-the-money and has an intrinsic value of $0.80 (45.80-45). In addition, there is some time value associated with the option. The cost of the option contract is equal to the intrinsic value plus the time value. The time value depends on factors such as the time to expiration, volatility, interest rates, and dividends. Assuming the time value is $2.80, the total cost of the option contract would be $0.80 + $2.80 = $3.60 per share, or $360 for one contract (since each contract covers 100 shares). Therefore, the answer is C) $280.00.

Underlying Stock Price: 45