The common stock of Winsson,Inc. is currently priced at $52.50 a share. One year from now,the stock price is expected to be either $54 or $60 a share. The risk-free rate of return is 4%. What is the value of one call option on Winsson stock with an exercise price of $55?
A) $0.39
B) $0.41
C) $0.45
D) $0.48
E) $0.51

Question

Quizplus · Accepted Answer

The value of the call option is $0.48. The call option gives the holder the right, but not the obligation, to buy the stock at the exercise price of $55. The stock is expected to be worth $54 or $60 in one year, so the call option is worth the difference between the expected stock price and the exercise price, minus the present value of the exercise price. The present value of the exercise price is $55/(1+0.04) = $52.94. Therefore, the value of the call option is $54 - $52.94 = $0.48.

The Common Stock of Winsson,Inc