Rocky Scholes Swimwear's warrant is trading for $10.00. The warrant carries the option to purchase a half share of common stock for $50. What is the speculative premium if the stock price is $65?

Question

Quizplus · Accepted Answer

To calculate the speculative premium, we need to compare the cost of buying a half share of common stock directly ($65/2 = $32.50) to the cost of buying the half share of common stock through the warrant ($50 + $10 = $60). 
So the speculative premium = ($60 - $32.50) = $27.50 for the half share of common stock.
But since the warrant only represents a half share, the speculative premium for one warrant is half of $27.50, which is $13.75. 
Therefore, the warrant is trading at a speculative premium of ($13.75 - $10.00) = $3.75. 
So none of the given options is correct.

Rocky Scholes Swimwear's Warrant Is Trading for $10