You as an investor had purchased a 4-month call option on the equity shares of ABC Ltd. of 10, of which the current market price is 660 per share…

CA Final · Advanced Financial Management · MTP · May 2024
You as an investor had purchased a 4-month call option on the equity shares of ABC Ltd. of 10, of which the current market price is 660 per share and the exercise price - 750. You expect the price to range between 600to 950. The expected share price of ABC Ltd. and related probability is given below: Expected Price (₹) 600 700 800 900 950 Probability 0.05 0.20 0.50 0.10 0.15 Evaluate the following: (i) Expected Share price at the end of 4 months. (ii) Value of Call Option at the end of 4 months if the exercise price prevails. (iii) In case the option is held to its maturity, estimate expected value of the call option?

Suggested Answer and Working Notes:

(i) Expected Share Price = 600 X 0.05 +700 X 0.20 +800 × 0.50 +900 X 0.10 +950 X 0.15 = 30 +140 +400 +90 +142.50 = 802.50 (ii) Value of Call Option = 750 -750 = Nil (iii) If the option is held till maturity the expected Value of Call Option Expected price (X) Value of call (C) Probability (P) CP 600 0 0.05 0 700 0 0.20 0 800 50 0.50 25 900 150 0.10 15 950 200 0.15 30 Total 70 * If the stock price goes below - 750, option is not exercised at all.

Topics: Derivatives Analysis & Valuation

Open in Interactive Practice Hub · Full Practice Hub · Chapter Weightage · More in this subject

Related Questions in this Topic