Fears the price of microsoft stock

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Reference no: EM132185067

Assume that Microsoft currently sells for $150. Your brother works for Microsoft and owns American call options with an exercise price of $100. The options expire one year from now. Assume the the annually compounded interest rate is 2% per annum and that Microsoft does not pay dividends.

Your brother wants to exercise his options immediately because he fears the price of Microsoft stock will fall. Explain to him why this is a bad idea by explaining what steps he should do instead. Go through the two possible scenarios at expiration, where Microsoft stock is above or below $100.

Reference no: EM132185067

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