Calculate the price of a call option

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Reference no: EM132949267

Question

Main Street Plc. is a stock which is responsible for the project management and processes of the major carriageway/road projects in the United Kingdom. It has previously maintained a dividend of around £0.10 per share, for the last 5 years at least. The firm has received a contract to expand its services to the French government in selected areas, in which case, depending on its management of these projects the firm's profitability is expected to increase in future periods

MS Plc. current share price is £7.80. The outcomes of the contracts and the managements ability to manage current assets, means that there is a standard expectation of 1-year volatility in share price of 24%. The risk-free rate of 2%.

An investor who has been observing the share price and profitability of MS Plc. feels, [without definite knowledge] that the profitability of MS Plc. will increase in future, and therefore would like to own the asset in future, has been considering their investment via options.

Can you please Calculate the price/premium of a CALL option with a STRIKE of £7.85 for 1 year in the future?

Given the information you have been provided in the scenario, which option should the investor BUY, fully explaining your rationale.?

Reference no: EM132949267

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