An Alternative Strategy

Now consider a different strategy. You take your $115 and purchase a one-year call option on Microsoft with a strike price of $105. The premium is $15. That leaves you with $100, which you decide to invest in a riskless asset such as a T-bill. The risk-free rate is 5 percent.

'Of course, in reality, you can't buy an option on just one share, so you would need to buy 100 shares of Microsoft and one put contract at a minimum to actually implement this strategy. We're really just explaining the calculations on a per-share basis.

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

VIII. Topics in Corporate Finance

24. Option Valuation

© The McGraw-Hill Companies, 2002

CHAPTER 24 Option Valuation

Stock Price in One Year

Value of Call Option (Strike Price = $105)

Value of Risk-Free Asset

Combined Value

Total Gain or Loss (Combined Value Less $115)

$125

$20

$105

$125

$10

0 0

Post a comment