infinitybenzo

CFAdreams Wrote:
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> Tony Smith believes the price of a particular
> underlying, currently selling at $96, will
> increase substantially in the next 6 months, so he
> purchases a European call option expiring in 6
> months. The call option has an excercise price of
> $101 and sells for $6.
>
> What is the current value of potential credit
> risk? (Also an explanation of why if you can)

$6, because you've basically loaned the writer of the option $6 for their promise to pay you the face value of that option at an unspecified point in time.

Should that point in time be 5 minutes after you've purchased it, they would theoretically pay you $6 back, which is the BSM price of said option.