Reference no: EM132734429
Problem - Assume that you have just been hired as a financial analyst by Triple Play Inc., a mid-sized California company that specializes in creating high-fashion clothing. Because no one at Triple Play is familiar with the basics of financial options, you have been asked to prepare a brief report that the firm's executives can use to gain a cursory understanding of the topic.
To begin, you gathered some outside materials on the subject and used these materials to draft a list of pertinent questions that need to be answered. In fact, one possible approach to the report is to use a question and-answer format. Now that the questions have been drafted, you have to develop the answers.
Consider Triple Play's call option with a $25 strike price. The following table contains historical values for this option at different stock prices:
|
Stock Price
|
Call Option Price
|
|
$25
|
$3.00
|
|
30
|
7.50
|
|
35
|
12.00
|
|
40
|
16.50
|
|
45
|
21.00
|
|
50
|
25.50
|
Required -
(1) Create a table that shows (a) stock price, (b) strike price, (c) exercise value, (d) option price, and (e) the time value, which is the option's price less its exercise value.
(2) What happens to the time value as the stock price rises? Why?