Assume That you have just sold a share for a loss of $75, for tax purposes. You still wish to maintain exposure to the sold share. Suppose that you buy a

Assume That you have just sold a share for a loss of $75, for tax purposes. You still wish to maintain exposure to the sold share. Suppose that you buy a call with a strike price of $70 and a price of $6.75. Calculate the effective price paid to repurchase the share if the price after 35 days is $80.

Expert Solution

Working:

Since the market Price of the share at $80 is above the strike price of $70, we would exercise the share.

The formula of effective price of the share to us would be

Effective price = minimum of (strike price, spot price) + premium paid

Effective price = minimum of ($70, $80) + premium paid

Effective price = $70 + $6.25

Effective price = $76.25

Thus the effective price paid to repurchase the share back is $76.25.

Junaid answered 2 years ago

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