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FIN250 Fundamentals Of Corporate Finance

Fundamentals Of Corporate FinanceTU Board 2077

Suppose you have purchased a call option of Unilever Limited. Each call option entitles you to purchase one stock of the company at a price of Rs. 1200. The option premium for one call option is…

2

Suppose you have purchased a call option of Unilever Limited. Each call option entitles you to purchase one stock of the company at a price of Rs. 1200. The option premium for one call option is Rs.30. The expiration period of the option is 3 month. If the stock price of the company becomes Rs. 1500 at the expiration date. Calculate value of call option.

Answer

· Based on the official syllabus and past papers
Updated

The value of a call option at expiration is calculated as the difference between the market price of the stock and the strike price, minus the option premium paid. If the market price is greater than the strike price, the option is exercised; otherwise, it expires worthless.

Given:

  • Strike price = Rs. 1200
  • Market price at expiration = Rs. 1500
  • Option premium = Rs. 30

Calculation:

  1. Intrinsic value of the call option = Market price − Strike price = Rs. 1500 − Rs. 1200 = Rs. 300
  2. Since the market price exceeds the strike price, the option is exercised.
  3. Value of the call option = Intrinsic value − Option premium = Rs. 300 − Rs. 30 = Rs. 270

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