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    A company's share is currently trading at Rs. 240. In 6 months, there is an 80% chance the price will be Rs. 250 and a 20% chance the price will be Rs. 220. There is a European call option on the share with an exercise price of Rs. 230. To calculate the expected value of the call option on maturity, the expected share price, exercise price, potential call value (expected price - exercise price), probability of each potential price, and call option value (potential call value x probability) are listed in a table. The expected value is the sum of the call option values, which is Rs. 16.

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    A company's share is currently trading at Rs. 240. In 6 months, there is an 80% chance the price will be Rs. 250 and a 20% chance the price will be Rs. 220. There is a European call option on the share with an exercise price of Rs. 230. To calculate the expected value of the call option on maturity, the expected share price, exercise price, potential call value (expected price - exercise price), probability of each potential price, and call option value (potential call value x probability) are listed in a table. The expected value is the sum of the call option values, which is Rs. 16.

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    9 views1 page

    Untitled

    Uploaded by

    fxn fnd
    A company's share is currently trading at Rs. 240. In 6 months, there is an 80% chance the price will be Rs. 250 and a 20% chance the price will be Rs. 220. There is a European call option on the share with an exercise price of Rs. 230. To calculate the expected value of the call option on maturity, the expected share price, exercise price, potential call value (expected price - exercise price), probability of each potential price, and call option value (potential call value x probability) are listed in a table. The expected value is the sum of the call option values, which is Rs. 16.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
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    of 1

    Example: A company’s share is currently trading at `240.

    After 6 months, the price will be either `250 with probability


    of 0.80 or `220 with probability of 0.20. A European call option exists with an exercise price of `230. What will be the
    expected value of call option on maturity date?

    Solution:
    Expected Share Price (`) Exercise Call Value Probability Call Option
    (1) Price (`) (`) Value (`)
    (2) (3) = (1) − (2) (4) (5) = (3) × (4)
    250 230 20 0.80 16
    220 230 0 0.20 0
    16

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