Option Valuation: Consider a Call Option with a Strike Price

question 26

Multiple Choice

Option valuation: Consider a call option with a strike price of $10, which expires in one year. The risk-free rate of interest is 10 per cent. The current underlying share price is $30. Without arbitrage, which of the following is a possible price for the call option?

• A) $0
• B) $20.50
• C) $21.00
• D) None of the above

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Definitions:

Reconcile

A process of ensuring two sets of records (usually the balances of two accounts) are in agreement.

Variable Costing

A cost accounting method that encompasses solely variable costs involved in production (direct materials, direct labor, and variable manufacturing overhead) for product cost calculation.

Contribution Format

A type of income statement layout that separates fixed costs from variable costs to highlight the contribution margin.

Absorption Costing

An accounting method that includes all manufacturing costs, both fixed and variable, in the cost of a produced unit.