Consider the following equation: C = P + S - PV(K)- PV(Div)
In this equation, what does the term K represent?
A)the current share price
B)the price of a zero-coupon bond
C)the value of the call option
D)the exercise price of the option

Question

Quizplus · Accepted Answer

K represents the exercise price of the option. This is because PV(K) refers to the present value of the exercise price of the option, which is subtracted from the sum of P (the present value of the expected payoff from the underlying asset), S (the present value of any expected cash flows not related to the underlying asset), and PV(Div) (the present value of any expected dividends from the underlying asset). Therefore, K cannot represent the current share price, the price of a zero-coupon bond, or the value of the call option.

Consider the Following Equation: C = P + S -