Question

In: Finance

a) Suppose that both a call and a put are traded on the stock of ABC...

a) Suppose that both a call and a put are traded on the stock of ABC Company; both have strike prices of $30 and mature in one-year. What is the payoff to the call option if the stock price is $25 at the end of the year?

b) Suppose that both a call and a put are traded on the stock of ABC Company; both have strike prices of $30 and mature in one-year. What is the payoff to the call option if the stock price is $35 at the end of the year?

c) Suppose that both a call and a put are traded on the stock of ABC Company; both have strike prices of $30 and mature in one-year. What is the profit to the call option if the option premium is $3 and the stock price is $35 at the end of the year?

d) Suppose that both a call and a put are traded on the stock of ABC Company; both have strike prices of $30 and mature in one-year. What is the profit to the put option if the option premium is $4 and the stock price is $35 at the end of the year?

Solutions

Expert Solution

a. Strike Price = $30

Stock Price = $25

Call option will be exercised if the stock price is higher than the strike price or else expired. but in this case strike price is greater than stock price which means the options will be expired.

Thus Payoff = $0

b. Strike Price = $30

Stock Price = $35

Call option will be exercised if the stock price is higher than the strike price or else expired. in this case strike price is Lower than stock price which means the options will be exercised.

Payoff = Stock price - strike price

Payoff = $35 - 30

Payoff = $5

c. Strike Price = $30

Stock Price = $35

Option premium = $3

Call option will be exercised if the stock price is higher than the strike price or else expired. in this case strike price is Lower than stock price which means the options will be exercised.

Payoff = Stock price - strike price - Option premium

Payoff = $35 - 30 - 3

Payoff = $2

d. Strike Price = $30

Stock Price = $35

Option premium = $4

Put option will be exercised if the stock price is Lower than the strike price or else expired. in this case Stock price is higher than stock price which means the options will be lapsed.

Payoff = - Option premium

Payoff = - $4

Please comment if you face any difficulty and please dont forget to upvote

jeff jeffy answered 1 year ago
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