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    • Avatar of John Moffat says

      If it was a call option exercisable immediately, then the option gives you the right to buy a share at a fixed price.

      So, for example, if the current share price is $4.00 and you could buy an option giving you the right to buy the share at an exercise price of $3.70, then you could buy the share for $3.70 and immediately sell it for $0.30.
      Nobody is going to give you that right free! You would be prepared to pay $0.30 for the option. Then you could use it and buy a share for $3.70. You have then spent $4.00 in total and you own a share worth $4.00 :-)

      (But of course, that is only if the option were exercisable immediately. In practice the option will be the right to buy a share at a fixed price on a future date, and to get the value of that we need to use all the formulae.)

  1. avatar says

    This is invaluable! I have a scientific calculator and i had no idea how all this buttons worked ln and e* now you have educated me on the standard normal distribution table! whew u saved me a head ache. for a while there when i saw the formulae i imagened it must be some enginering formulae forgotten on P4 paper by error!

    It means this paper should have more calculations and less writing , how then are we expected to mix the two?! I mean just one question on options is enough to give one a head ache. God have mercy on us!

    But Thank God for Opentuition iam confident iam finalising and passing this June 2013 exams. Watch this space i will update u all. John you are our guardian angel!

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