The common stock of New Horizon Homes is selling for $68.70 a share. U.S. Treasury bills are currently yielding 4.65 percent. What is the current value of a one-year call option on this stock if
The exercise price is $67.50 and you assume the option will ﬁnish in the money?

Question

Quizplus · Accepted Answer

The intrinsic value of the call option is the difference between the stock price and the exercise price, which is $68.70 - $67.50 = $1.20. Adding the time value, which is the risk-free rate (4.65%) applied to the exercise price for one year, gives $67.50 * 0.0465 = $3.14. The total value is $1.20 + $3.14 = $4.34, approximated to $4.20.

The Common Stock of New Horizon Homes Is Selling for $68.70