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Unformatted text preview: rice]. Thus, when the
stock price is equal to $550.9 the option is worth $150.9 (i.e. $550.9 - $400) when exercised. When
the stock price is equal to $400 the value of the option is 0, whereas if the stock price falls below the
exercise price the option is not exercised and, hence, the value is equal to zero. Download free ebooks at bookboon.com
82 Corporate Finance - Options In Month 3 suppose that the stock price is equal to $469.4. In this case, investors would know that
the future stock price in Month 6 will be $550.9 or $400 and the corresponding option prices are
$150.9 and $0, respectively. To find the option value, simply set up the option equivalent by
calculating the option delta, which is equal to the spread of possible option prices over the spread of
possible stock prices. In this case the option delta equals 1 as ($150.9-$0)/($550.9-$400) = 1. Given
the option delta find the amount of bank loan needed:
Month 6 stock price equal to
$150.9 Buy 1 share
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This note was uploaded on 10/26/2012 for the course 19 19 taught by Professor - during the Spring '12 term at Sunway University College.
- Spring '12