EXAMPLE

Suppose the market price of equity share of Reliance on the expiration date is Rs 140 and the exercise price is Rs 125. The value of call option is Rs 15 (Rs 140 - Rs 125). In case, the value of the share on expiration date turns out to be Rs 120,the value of C1 would not be negative Rs 5 (Rs 120 - Rs 125); it would be zero as the investor would not purchase shares at Rs 125 which is available in the market and thereby incur a loss of Rs 5 per share.

The value of can option (for the facts contained. The price of share is plotted on X-axis and the call option value on Y-axis. It may be noted that for market price of share less than exercise price, the value of the option is zero; for S1 > E, the option has a positive value and increases in a linear manner, rupee for rupee, with the increase in the share price. For instance, when S1 goes up from Rs 140 to Rs 150 (by Rs 10), the value of call option also increases by Rs 10 (from Rs 15 to Rs 25).

Value of Call Option to Buyer

Value of Call Option to Buyer

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