How would the values of the put and call option change

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Question - Suppose that you are holding a European call option on General Motors stock that expires in 5 years. The option is currently at-the-money. GM's current stock price is $42.50 and the current yield on a 5-year Treasury bond is 2%. The standard deviation of returns on GM stock is 25%. For the purposes of this series of questions, you should assume that GM does not pay dividends.

Suppose that the current price of GM stock were $35 instead of $42.50, but the strike price of the options, the time to expiration, the risk-free rate, and the volatility of returns on GM stock were all the same. How would the values of the put and call option change? Provide a clear explanation for why the values move in the direction that you propose. (No additional calculations are necessary for this problem.)

Reference no: EM132977913

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