Guaranteed price on specified date of expiration

Assignment Help Finance Basics
Reference no: EM131435243

A call option gives the investor the right, but not the obligation, to purchase a stock at fixed/guaranteed price on specified date of expiration (Ehrhardt, 2017). In order to illustrate the picture, assume that ABC Company is trading at $100 per share, and let's say that you purchase a call option contract on ABC with $100 strike and at price of $2 until November 1st, 2017. The actual cost of this option would be $200 (100*$2). What about if the strike goes up to $105? Since the investor has the right to purchase company's shares at $100, He/she in this case can use the option to buy those shares at $100 and then, immediately sell them for $105 on the expiration date. Hence, the net profit from this trade would be $300 (100* $2 original cost - 100*$5 total sale price).

How about if a company's stock is trading at or below $101? Bu using the same analysis, we will figure out that the call option now is worth less than $200 (amount an investor has spent) and therefore, the buyer will loss his money in this case.

Does it called call options price, why?

Reference no: EM131435243

Questions Cloud

Promotion-advertising and sales promotion strategies : "Promotion, Advertising, and Sales Promotion Strategies"
Create a cost benefit analysis for an update : Create a cost benefit analysis for an update that will improve the business: structural, office equipment, or staff. You can be creative in determining what the business needs.  The cost will use the full amount of funds allotted to this improveme..
Suppose equal weights are put on the two pans of a beam : Suppose equal weights are put on the two pans of a beam balance, the arm is kept at an angle with the horizontal and released. Is the torque of the two weights about the middle point (point of support) zero? If so, why does the arm rotate and fina..
How to conduct security awareness training : What are some strategies for John to reduce risks to unauthorized access to the ePHI and give him suggestions on how to conduct security awareness training for his employees who will be working remotely in the future. Be sure to discuss key points ad..
Guaranteed price on specified date of expiration : A call option gives the investor the right, but not the obligation, to purchase a stock at fixed/guaranteed price on specified date of expiration (Ehrhardt, 2017).
How they compare with new public management : Many would believe that "Taylorism has no place in modern public administration. Based on Federick Taylor and Modern Administration, describe of whether and to what extent his writings are relevant and how they compare with New Public Management (NPM..
From the e-activity-evaluate amazons pricing strategy : From the e-Activity, evaluate Amazon's pricing strategy. Select two products and compare the price to those of "brick and mortar" retailer. Determine the price strategy used for these two products in each selling venue and give a plausible explanatio..
Explain one disciplinary technique you either have used : Explain one disciplinary technique you either have used or had used on you. Based on the reading, was the technique proper? Explain why or why not.
To what extent does its government intervene in trade : To what extent does its government intervene in trade? What are its political, economic, or cultural motives for intervention? What methods, if any, does the government use to: (a) promote exports, and (b) restrict imports?

Reviews

Write a Review

Finance Basics Questions & Answers

  Briefly explain why two bonds that have an equal ytm

Briefly explain why two bonds that have an equal YTM

  Find effective annual rate under the line of credit

Cumberland Furniture wants to establish a prearranged borrowing contract with a local commercial bank. The bank's terms for a line of credit are 3.30 percent over the prime rate, & each year the borrowing must be decreased to zero for a 30-day period..

  What is the standard deviation of a position

What is the standard deviation of a position that is long 5 units of the spot asset and is hedged by shorting 4 units of futures?

  You are a data analyst with john and sons company the

you are a data analyst with john and sons company. the company has a large number of manufacturing plants in the united

  What is the value of the shareholders

Sankey, Inc., has current assets of $6,000, net fixed assets of $23,200, current liabilities of $5,600, and long-term debt of $13,600. (Do not round intermediate calculations.) What is the value of the shareholders' equity account for this firm?

  Impact of ecb response to greece crisis

How did the debt repayment problems in Greece affect creditors from other countries in Europe? -  How did the ECB's stimulative monetary policy affect the Greek crisis?

  Should the short-run effects on eps influence the choice

Should the short-run effects on EPS influence the choice between the two projects?

  Provide a specific example of a company that took an action

provide a specific example of a company that took an action that might have increased short run profits but had the

  Which of the following is appropriate closing entry for sale

Calico corners a small gift shop earned sales revenues for the year totaling $62,500. Which of the following is the appropriate closing entry for the sales revenues account at the end of the period?

  Straight-line to a zero book value over the life of project

1. Thornley Machines is considering a 3-year project with an initial cost of $618,000. The project will not directly produce any sales but will reduce operating costs by $265,000 a year. The equipment is depreciated straight-line to a zero boo..

  Determining the price of the stock

A put option on Macrohard stock with a strike price of $36 has a time value of $1.50, and a premium of $4.00. What must be the price of the stock?

  What type of agency cost is this provision

If a manager signs a contract with a strict provision prohibiting the manager from competing against this company if the manager leaves the company, what type of agency cost is this provision?

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd