You own a call option on Beaker Glass stock that expires in one year. The exercise price is $35. The current price of the stock is $38.20 and the risk-free rate of return is 4.7 percent. Assume the option will finish in the money. What is the current value of the call option?
A) $0
B) $1.49
C) $3.97
D) $4.77
E) $5.46

Question

Quizplus · Accepted Answer

The current value of the call option can be approximated using the Black-Scholes model or a similar option pricing model. However, without going into complex calculations, we can understand that since the option is in the money (current stock price > exercise price), its value must be greater than $0. The exact value requires specific calculations not provided in the question, but given the options, $4.77 is a plausible value considering the intrinsic value and the time value of the option. The intrinsic value is the difference between the current stock price and the exercise price, which is $3.20 ($38.20 - $35.00). The option's value must also include the time value, which accounts for the potential additional gain due to the stock's price movement and the risk-free rate of return until the option expires. Therefore, $4.77 seems reasonable as it is higher than the intrinsic value, accounting for the time value.

You Own a Call Option on Beaker Glass Stock That