A Three-Month Call Option with a Strike Price of $30

question 50

Essay

A three-month call option with a strike price of $30 is currently selling for $4 when the price of the underlying stock is selling for $32.
​
a. What is the call's intrinsic value?
​
b. What is the time premium?
​
c. What is the maximum possible loss to the buyer of the call?
​
d. What is the maximum possible profit to the seller of the option?
​
e. Would you buy the call if you expected the price of the stock to fall?
​
Three months later the stock is selling for $39.
​
f. What is your profit or loss from buying the stock?
​
g. What is the option's intrinsic value?
​
h. What is your profit or loss from selling the call?
​
i. If you let the option expire, what do you receive?
​
j. What are the percentage returns you earned on investments in the call and in the stock?
​
k. If the price of the stock had been $30 at the option's expiration, what would have been the percentage returns on investments in the call and in the stock?
​
l. What is the primary reason for purchasing a call instead of the underlying stock?

---

Definitions:

Synergy Value

The additional value created by combining two companies, resulting from efficiencies or growth opportunities not available to either company individually.

Cash Acquisition

A method of purchasing a company or asset where the buyer uses cash as the form of payment rather than stocks or other forms of payment.

Equity-Financed

Refers to the way of raising funds for business activities by selling ownership stakes in the company, rather than borrowing money.

Post-Merger

The period following the completion of a merger or acquisition, during which integration and restructuring processes occur.