course hero 10 - T-bills currently yield 5.7 percent. Stock...

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T-bills currently yield 5.7 percent. Stock in Nina Manufacturing is currently selling for $56 per share. There is no possibility that the stock will be worth less than $49 per share in one year. (Round answers to 2 decimal places. If the answer is zero, input as "0".) a. The value of a call option with an exercise price of $42 is $________. The intrinsic value is $14. A person can buy the call and short the stock. Amount received on shorting the stock= $56 If this amount is invested at the risk free rate of 5.70% Amount at the end of 1 year= $59.28 =56 x exp ( 5.7% ) Since there is no possibility that the stock will be worth less than $49 per share in one year, ie the share price at the end of one year is greater than the exercise price, the call option would be exercised Exercise price= $42 Profit at the end of 1 year= $17.28 =59.28 - 42 The present value of this amount= $16.32 =17.28 x exp ( - 5.7% ) If the value of call is less than this there would be an arbitrage opportunity If the value of call is greater than this amount , no one would buy the call as it would be
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course hero 10 - T-bills currently yield 5.7 percent. Stock...

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