Ch13MiniCase

# Ch13MiniCase - Chapter 13 Mini Case for Financial Options and Real Options Note This sheet contains the mini case for Financial Options The mini

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2/23/2003 Chapter 13. Mini Case for Financial Options and Real Options SITUATION LOOKING AT EXERCISE AND MARKET VALUE OF AN OPTION Exercise (strike) price = \$25 Price of Exercise Exercise the stock Price Value \$0 \$20.00 \$0.00 \$5 \$20.00 \$0.00 \$10 \$20.00 \$0.00 \$15 \$20.00 \$0.00 \$20 \$20.00 \$0.00 \$25 \$20.00 \$5.00 \$30 \$20.00 \$10.00 \$35 \$20.00 \$15.00 \$40 \$20.00 \$20.00 \$45 \$20.00 \$25.00 (1.) What are the corresponding exercise values and option price premiums? Strike Price= \$25 Stock Price Option Price Exercise Values Option Premiums \$25.00 \$3.00 \$0.00 \$3.00 \$30.00 \$7.50 \$5.00 \$2.50 \$35.00 \$12.00 \$10.00 \$2.00 \$40.00 \$16.50 \$15.00 \$1.50 \$45.00 \$21.00 \$20.00 \$1.00 \$50.00 \$25.50 \$25.00 \$0.50 Note: This sheet contains the mini case for Financial Options. The mini case for Real Options is in the sheet with the TAB labeled "Real Options." Assume that you have just been hired as a financial analyst by Tropical Sweets Inc., a mid-sized California company that specializes in creating exotic candies from tropical fruits such as mangoes, papayas, and dates. The firm's CEO, George Yamaguchi, recently returned from an industry corporate executive conference in San Francisco, and one of the sessions he attended was on real options. Since no one at Tropical Sweets is familiar with the basics of either financial or real options, Yamaguchi has asked you to prepare a brief report that the firm's executives could use to gain at least a cursory understanding of the topics. To begin, you gathered some outside materials on the subject and used these materials to draft a list of pertinent questions that need to be answered. In fact, one possible approach to the paper is to use a question-and-answer format. Now that the questions have been drafted, you have to develop the answers. a. What is a real option? What is a financial option? What is the single most important characteristic of an option? Answer: See Chapter 13 Mini Case Show b. Options have a unique set of terminology. Define the following terms: (1) call option; (2) put option; (3) exercise price; (4) striking, or strike price; (5) option price; (6) expiration date; (7) exercise value; (8) covered option; (9) naked option; (10) in-the-money call; (11) out-of-the-money call; and (12) LEAP. Answer: See Chapter 13 Mini Case Show Suppose a stock has the exercise (strike) price shown below. The Exercise Value is the profit if you choose to exercise the stock. If the current price of the stock is greater than the exercise price, then the Exercise Value is the current stock price minus the exercise price; otherwise, it is zero (you would never exercise the option if the stock price is less than the exercise price.) c. Consider Tropical Sweets’ call option with a \$25 strike price. The following table contains historical values for this option at different stock prices: (2.) What happens to the premium of option price over exercise value as the stock price rises? The premium falls as the stock price increases; see the graph below. Why?

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## This note was uploaded on 11/16/2009 for the course F 3033 taught by Professor Hh during the Spring '09 term at Maastricht.

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Ch13MiniCase - Chapter 13 Mini Case for Financial Options and Real Options Note This sheet contains the mini case for Financial Options The mini

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