Question

In: Finance

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.

Solutions

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


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