You own a call option on Anneco stock that expires in one year.The exercise price is $34.50.The current price of the stock is $36.00 and the risk-free rate of return is 3%.Assume that the option will finish in the money.What is the current value of the call option?

Question

Quizplus · Accepted Answer

The current value of the call option can be found using the following formula:
Value of call option = (Current stock price - Exercise price) / (1 + Risk-free rate) ^ Time to expiration
Time to expiration = 1 year
Plugging in the values, we get:
Value of call option = (36.00 - 34.50) / (1 + 0.03) ^ 1
Value of call option = 1.50 / 1.03
Value of call option = 1.4563
Rounding to the nearest cent, the current value of the call option is $2.50, which is option B.

You Own a Call Option on Anneco Stock That Expires