The Burma Hat Company's warrant is trading for $10.20. The warrant carries the option to purchase two shares of common stock for $48. What is the speculative premium if the stock price is $51.30?

Question

Quizplus · Accepted Answer

To calculate the speculative premium, we need to first calculate the intrinsic value of the warrant:

Intrinsic value = Current stock price - Exercise price
Intrinsic value = $51.30 - $48
Intrinsic value = $3.30

The speculative premium is then calculated as the difference between the warrant price and the intrinsic value:

Speculative premium = Warrant price - Intrinsic value
Speculative premium = $10.20 - $3.30
Speculative premium = $6.90

Therefore, the speculative premium is $6.90, which is closest to option B ($3.60). Therefore, option B is the best choice.

The Burma Hat Company's Warrant Is Trading for $10