You own a call option on Pester Me stock that expires in one year. The exercise price is $22.50. The current price of the stock is $26.40 and the risk-free rate of return is 4 percent. Assume that the
Option will ﬁnish in the money. What is the value of the call option?
A) -$4.77
B) -$3.90
C) $0
D) $3.90
E) $4.77

Question

Quizplus · Accepted Answer

The value of the call option is the difference between the current stock price and the exercise price, discounted at the risk-free rate. The intrinsic value is $26.40 - $22.50 = $3.90. However, since the option will finish in the money, the present value of the exercise price is $22.50 / (1 + 0.04) = $21.63. The value of the call option is $26.40 - $21.63 = $4.77.

You Own a Call Option on Pester Me Stock That