True or false 2. A call option with a strike price of 101 on a zero-coupon...
True or false
2. A call option with a strike price of 101 on a zero-coupon bond will never be in the money.
Homework Answers
True
In the money call option means the market price of underlying stock is greater than strike price of call option. Assuming above coupon bond has par value of $100 and its call option strike price is $101. A zero-coupon bond always priced at discount which means its market price always less than its par value until it reaches to its maturity. Since, call option strike price is above the zero-coupon bond's par value, market price of zero coupon bond never exceed the strike price of call thus, this call option with strike price of $101 on a zero coupon bond will never be in the money.
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