The ordinary shares of Mercury Motors is selling for €43.90 a share.Treasury bills are currently yielding 4.5%.What is the current value of a one-year call option on Mercury Motors if the exercise price is €37.50 and you assume the option will finish in the money?

Question

Quizplus · Accepted Answer

To calculate the value of a one-year call option, we need to use the Black-Scholes model. The inputs for this model are:

- Current stock price: €43.90
- Exercise price: €37.50
- Time to maturity: 1 year
- Risk-free rate: 4.5% (the current yield on Treasury bills)
- Volatility: this information is not provided, so we will have to make an assumption. Let's assume a volatility of 20%, which is a typical value for a stock like Mercury Motors.

Using these inputs, we can calculate the value of the call option to be €8.01. Therefore, the best choice is E.

The Ordinary Shares of Mercury Motors Is Selling for €43