How many call options should vem buy in anticipation

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Real Options Supply ContractCX : Instead of wholesale contract, suppose CAV (the manufacturer) offers the following deal to VEM (the retailer): Ahead of Ramadan, VEM buys Q call options at unit cost . Each call option gives VEM the right (but not the obligation) to buy one alarm clock from CAV at a unit exercise price of after VEM observes the demand. In effect, VEM makes CAV produce Q alarm clocks ahead of Ramadan, by paying a price C for each unit. After the demand is known, VEM pays an additional price X to buy each clock, but the quantity is limited up to Q. Note that there is no fixed "wholesale price" for the real option contract.

Problem 1: If CAV offers an option price C = 8 Riyals and an exercise price, X = 40 Riyals, how many call options should VEM buy in anticipation of Ramadan?

Reference no: EM132959008

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