Tutorial+12_Derivatives+with+solution - Tutorial 12 Option...

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Tutorial 12: Option Valuation 1. What is the value of a call option at maturity? What is the value of a put  option at maturity? Based on your answer, what are the intrinsic values of a  call and a put option? 2. You notice that shares of stock in the Patel Corporation are going for $50 a  share.  Call options with an exercise price of $35 per share are selling for  $10.   What’s wrong here? Describe how you can take advantage of this  mispricing if the option expires today. 3. What is the time value of an option?  Why does an option’s time value decline  as the option approaches expiration? 4. Use the following option quotes to answer the questions below. Milson Ltd                                               Call Options                         Put Options                             Spot ExpiryStrike Premium (Contract) Premium (Contract) 59 Mar 55 350 106 59 Apr 55 625 115 59 Jul 55 863 363 59 Oct 55 1025 325 (a) Are the call options in the money? What is the intrinsic value of a Milson Co  call option? (b) Are put options in the money? What is the intrinsic value of a Milson Co put  option? (c) Two of the options are clearly mispriced. Which ones? At a minimum, what  should the mispriced options sell for? Explain how you could profit from the  mispricing in each case.
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This note was uploaded on 06/01/2011 for the course FIN 3026W taught by Professor Drtoerien during the Summer '09 term at University of Cape Town.

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Tutorial+12_Derivatives+with+solution - Tutorial 12 Option...

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