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The price of a stock is $40. The price of a one-year European put option on...

  1. The price of a stock is $40. The price of a one-year European put option on the stock with a strike price of $30 is quoted as $7 and the price of a one-year European call option on the stock with a strike price of $50 is quoted as $5. Suppose that an investor buys 100 shares, shorts 100 call options, and buys 100 put options.

  1. Construct a payoff and profit/loss table

Solutions

Expert Solution

Solution:

Current price = $40

Call option: Strike price = 50 and premium = 5

Put option: Strike price = 30 and premium = 7

Payoff of stock = Spot price - Purchase price = Spot price -40

Payoff of short call option = MIN (Spot price - Strike Price, 0) + Premium

Payoff of long put option = MAX (Strike Price - Spot Price, 0) - Premium

jeff jeffy answered 2 years ago
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