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JKCPA
JKCPA, CPA
Category: Finance
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Experience:  Bachelors degree and CPA with Accounting experience.
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A call option on Bedrock Boulders stock has a market price

Resolved Question:

A call option on Bedrock Boulders stock has a market price of $7. The stock sells for $30 a share, and the option has an exercise price of $25 a share.

a) What is the exercise value of the call option?
b) What is the premium on the option?
Submitted: 6 years ago.
Category: Finance
Expert:  JKCPA replied 6 years ago.

Hello,

 

Thanks for your question.

 

a. The stock price is $30. The strike (exercise) price is $25. Therefore, the inherent value is $30-$25= $5 (difference between stock price and exercise price).

b. However, the option's market value is $7 which is $2 more than the inherent value of $5. Therefore, the premium on the option is $2 which represents the remaining time value of the option.

Hope this helps!

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