Option valuation: Consider a call option with a strike price of $10, which expires in one year. The risk-free rate of interest is 10 percent. The current underlying stock price is $30. Without arbitrage, which of the following is a possible price for the call option?

Question

Quizplus · Accepted Answer

The value of a call option is given by the formula: (current stock price - strike price) / (1 + risk-free rate)^time to maturity. Plugging in the given values, we get: (30-10)/(1+0.1)^1 = $18.18. However, since the option can never be negative, the possible price for the call option is the maximum of $18.18 and $0, which is $21.00 (Option C). Therefore, option C is the best choice.

Option Valuation: Consider a Call Option with a Strike Price