Question

Current stock price is 27 while a call option is available with a strike price of 20 and at a price of 3.77. A 1:2 Hedge is formed. If after a certain time, stock price declines to 15.5, Net Profit (Loss) of the trader is ________. In contrast, if stock price increases to 26, net profit (loss) will be ________. At price stock price ________ and _______, net payoff will be zero.

Answer 1

Current stock price is 27 while a call option is available with a strike price of 20 and at a price of 3.77. A 1:2 Hedge is formed. If after a certain time, stock price declines to 15.5, Net Profit (Loss) of the trader is ___A_____. In contrast, if stock price increases to 26, net profit (loss) will be ____B____. At price stock price ___C_____ and ____D___, net payoff will be zero

Following are the Answers( Refer the Alphabet

A) Net Loss will be 3.77, as buyer is not going to purchase at 20 and Sell it at 15.5. in this contrast loss will be primium paid by the buyer while purchasing the call option i.e. -3.77

B)Net Profit = 26-20-3.77

Net Profit = 2.23

as the Buyer will purchase at 20 and sell stock at 26 and Primium will be Deducted

C) At Price 23.77 there will be no loss or no profit as the buyer will excercise the option and sell with no profit and no loss, hence net pay off will be Zero at price 23.77

D) At price 20 there will be loss of Primium amount 3.77