Phocuscorp's stock is currently worth $60. The replicating portfolio consists of one-half share and $24.50 risk-free loan. Compute the value of call option.

Question

Quizplus · Accepted Answer

The value of the call option can be calculated using the replicating portfolio approach. The value of the replicating portfolio is the sum of the value of one-half share of Phocuscorp's stock and the $24.50 risk-free loan. Since the stock is worth $60, one-half share is worth $30. Therefore, the total value of the replicating portfolio is $30 + $24.50 = $54.50. Given that the stock is currently worth $60, the value of the call option (which allows buying the stock at the price of the replicating portfolio) is $60 - $54.50 = $5.5.

Phocuscorp's Stock Is Currently Worth $60