Consider a European call option on DELL that has an exercise price of $100 and four months (14%) until expiration. The annual risk-free rate of interest is 0.07%, compounded continuously. DELL call option and stock are priced at $5.79 and $97.80 per share, respectively, today. (a) Compute today’s value of a European put option on DELL that has the same exercise price and expiration date as the above call option on DELL. Show numerically which option has a higher time value of option. (b) Compute the profit to the writer of the in/at/out of (circle one) money put option if DELL stock is priced at $95.0 when the option expires. (c) Suppose that DELL has 10 million shares of common stock outstanding, and issues one million warrants that each can be exchanged for 2 shares of common stock. The warrant has the same exercise price and expiration date as the above call option on DELL. (i) Compute the value of each warrant that is in/at/out of (circle one) money. (ii) If you currently own 1,000 shares of DELL stock, compute the change in your fractional ownership at the expiry of the warrants, assuming that DELL stock is then priced at $102.0.
Consider a European call option on DELL that has an exercise price of $100 and four months (14%) until expiration. The annual risk-free rate of interest is 0.07%, compounded continuously. DELL call option and stock are priced at $5.79 and $97.80 per share, respectively, today. (a) Compute today’s value of a European put option on DELL that has the same exercise price and expiration date as the above call option on DELL. Show numerically which option has a higher time value of option. (b) Compute the profit to the writer of the in/at/out of (circle one) money put option if DELL stock is priced at $95.0 when the option expires. (c) Suppose that DELL has 10 million shares of common stock outstanding, and issues one million warrants that each can be exchanged for 2 shares of common stock. The warrant has the same exercise price and expiration date as the above call option on DELL. (i) Compute the value of each warrant that is in/at/out of (circle one) money. (ii) If you currently own 1,000 shares of DELL stock, compute the change in your fractional ownership at the expiry of the warrants, assuming that DELL stock is then priced at $102.0.
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