Value of Investment at Year-end 1 (i) When Shares are Purchased and (ii) when Call Options are Purchased In Conjunction with Treasury Bills.

Since both the alternatives have exactly the same value in the future, they should have the same value today; otherwise, difference in value gives rise to arbitrage. The value of call option (C) should be:

So = 4/3 C + (Rs 140/1 + R)
Rs 135 = 4/3 C + Rs 130.90
4/3 C = Rs 135 - Rs 130.90 = Rs 4.10
C = (Rs 4.10 * 3)/4 = Rs 3.075
Each call option is worth Rs 3.075. Table contains its verification

Value of Call Option

Time to Expiration/Maturity

Time to Expiration/Maturity

Thus, with the same investment outlay/cost (of Rs 135) both the alternatives yield the same value to the investor.

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