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seller of call option will be limited to gains resulting from selling the premium
for the option even though he/she has the stock with them. Yes, the quoted
put and call option prices appear to be consistent with this relationship.
Question 5.
Suppose that on January 18, 1994, Lotuss stock was valued at
$75.00 per share instead of $55.00. What is the very least you would
expect to pay for the February 1994 call option exercisable at $55?
What is the most? In general, what factors should enter into a
determination of the appropriate price to pay?
Underlying price of Lotuss stock per share $75.00
Exercise price of Lotuss stock per share $55.00
The maximum value of a call option is: Max (0, underlying price exercise
price) = Max ( 0, 75-55) = $20.
The minimum value of a call option is: $0.
Factors mentioned below play a major role in determining the price to pay: