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Business / Finance / Q&A Library / BCD Company offer its investors option contracts to buy their shares at a price of P50. Currently, the value of their stoc…

BCD Company offer its investors option contracts to buy their shares at a price of P50. Currently, the value of the…

Question

How much is the total option pay off for the stock? (No peso signs and other special characters but you are required to use two decimal places.)

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BCD Company offer its investors option contracts to buy their shares at a price of
P50. Currently, the value of their stocks in the market stands at P60. The 52-week
high of the
share price is P83 and its 52-week low is P47. The treasury bill issued by
the government yields 8.25% currently.

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Step 1 Call option and payoff:

A call option is the type of vanilla option that provides the right to buy the underlying assets, such as stocks and bonds on or before a maturity period at a certain
price. The option does not really exchange the stocks. It is created to hedge the fluctuations in the price of stocks. The payoff for the options is the difference
between the market price of the stocks and the exercise price of stocks that are underlying the option. The option premium paid by the option holders acts as a cost
and reduces a payoff value.

Step 2 Calculation and explanation:

The market price of the stock= P 60, the exercise price of stock: P50, 

As per the information, the option is related to buying the shares at a maturity period. Hence, it is a call option. The call option provides the payoff to the option
holder with the following method:

Payoff=Market value of underlying share − Exercise price of underlying share
=60 − 50
=10
The option has no cost in the form of a premium. So, the difference in the underlying prices provides the net payoff to the option holders.

Hence, the payoff is 10 for the option.

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