A one-year call option contract on Cheesy Poofs Co. stock sells for $1,170. In one year, the stock will be worth $49 or $70 per share. The exercise price on the call option is $62. What is the current value of the stock if the risk-free rate is 3 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e. g., 32.16.)

Question

Brian Daniel

Business

9 October, 19:17

A one-year call option contract on Cheesy Poofs Co. stock sells for $1,170. In one year, the stock will be worth $49 or $70 per share. The exercise price on the call option is $62. What is the current value of the stock if the risk-free rate is 3 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e. g., 32.16.)

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Ryann Blake · Answer 1

The current value of the stock if the risk-free rate is 3 percent $78.29

Explanation:

stock value

= [ (max. V - min. pr) / (max. V - exer. pr) * call price] + min. pr / (1+RFr)

= [ (max. V - min. pr) / (max. V - exer. pr) * stock price/number of contracts] + min. pr / (1+RFr)

= [ (70 - 49) / (70 - 62) * 1170/100] + 49 / (1 + 3%)

= $78.29

Therefore, The current value of the stock if the risk-free rate is 3 percent $78.29