In: Finance
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.
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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