Draw a profit or loss graph for a call option contract with an exercise price of...

Draw a profit or loss graph for a call option contract with an exercise price of $50 for
which a $5 premium is paid. You may assume the underlying asset’s price is as low as
$10 and as high as $80 (in even multiples of $10) and that the option is being evaluated
on its expiration date. Calculate and identify the breakeven point, maximum profits and
maximum losses.

Expert Solution


CALL OPTION CONTRACT:
Right , but no obligation to buy at EXERCISE PRICE
Exercise Price =$50
Premium paid =$5
Assume price at expiration =S
Payoff from the Call Option Purchase=Max.((S-50),0
	A	B	C	D=B-C
	Price at expiration	Payoff from Call Option	Premium Paid	Profit/(Loss)
	$10	$0	$5	($5)
	$20	$0	$5	($5)
	$30	$0	$5	($5)
	$40	$0	$5	($5)
	$50	$0	$5	($5)
BREAK EVEN POINT	$55	$5	$5	$0
	$60	$10	$5	$5
	$70	$20	$5	$15
	$80	$30	$5	$25

Break Even Point =$55
Maximum Profit =$25
Maximum Loss=$5

jeff jeffy answered 7 months ago

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