Description
Explain how real options are similar to, but different from, ordinary options. Explain why an option’s time value is greatest when the stock price is near the exercise price and why it nearly disappears when the option is deep- in -or out- of -the money. Stock currently priced at $100. One period later it can go up to $120, an increase of 20 percent, or down to $90, a decrease of 10 percent. Assume a call option with an exercise price of $100. The risk- free rate is 8 percent. Calculate the Theoretical fair value of the call.
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