Question 4

Pfintech plc’s shares are currently traded at the market price of $50.25 per share. You have the following information about the 3-month put and call options on Pfintech stock:

• Call option: Strike price = $52.50, premium = $1.62

• Put option: Strike price = $52.50, premium = $4.80

Assume at the expiry date of both options types, the market price of Pfintech stock is $56 per share.

Required:

(a) Calculate the payoffs to long position on both types of options.

(b) Calculate the payoffs to short positions on both types of options.

(c) Explain the following statement: “Employee stock options issued by a company are different from regular exchange-traded call options on the company’s stock because they can affect the capital structure of the company.”

(d) Critically evaluate the application of options in corporate finance.