The Value of a Call Option That Is Expected to Expire

question 38

Multiple Choice

The value of a call option that is expected to expire in the money can be expressed as:

• A) C₀ = E - S₀/(1 + R_f)^t.
• B) C₀ = S₀ - E/(1 + R_f)^t.
• C) C₀ = (S/C)(C₀) + S₀/(1 + R_f)^t.
• D) C₀ = (S/C)(C₀) - E/(1 + R_f)^t.
• E) C₀ = E - S1.

---

Definitions:

Current Stock Price

The price at which a stock is currently trading on the stock market.

Discount Rate

It refers to the rate used in discounted cash flow analysis for the purpose of calculating the present value of future expected cash flows.

Preferred Stock

A type of stock that provides a fixed dividend before any dividends are paid to common stockholders and usually has no voting rights.

Debt

A sum of money lent by one individual to another, with the agreement that it will be returned at a future time, typically with additional interest.