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21 October, 13:49

This morning, you purchased a call option on School house Supply Co. stock that expires in one year. The exercise price is $37.50. The current price of the stock is $37.60 and the risk-free rate of return is 3.1 percent. Assume the option will finish in the money. What is the current value of the call option?

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  1. 21 October, 14:16
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    The current value of the call option is $ 1.2275

    Explanation:

    According to the given data, we have the following:

    Current stock price=$37.60

    exercise price=$37.50

    the risk-free rate of return=3.1%

    Therefore, in order to calculate the current value of the call option we have to use the following formula:

    Value of Call = Current Stock Price - [ Exercise Price / (1 + Risk free rate) ]

    Value of Call = $ 37.60 - [ $ 37.50 / (1+0.031)) ]

    Value of Call = $ 37.60 - 36.37245

    Value of Call = $ 1.2275

    The current value of the call option is $ 1.2275
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