Question

In: Finance

Explain how the possible profit and loss possibilities arise for an individual who invests in a:...

  1. Explain how the possible profit and loss possibilities arise for an individual who invests in a:
    1. A Call Option
      1. Be sure to explain what a Call Option is.
      2. Be sure to incorporate the cost of the Call Option in your analysis.
    2. A Put Option
      1. Be sure to explain what a Put Option is.
      2. Be sure to incorporate the cost of the Put Option in your analysis.

Solutions

Expert Solution

a. i. Call option is the right of the buyer who pays a certain premium to the seller to buy a underlying asset at predetermined price.

ii. Possible profit and loss opportunities for call option  

Max ( Stock price at maturity  - strike price , 0 ) - premium (for buyer)

The possible profit and loss opportunities for investor

Profit is when the stock price at maturity exceeds the call price and premium paid

Maximum loss = Premium paid

b. i. Put option is the right of the buyer who pays a certain premium to the seller to sell a underlying asset at predetermined price.

ii. Possible profit and loss opportunities for call option  

Max ( Strike Price - Stock price at maturity , 0 ) - premium (for buyer)

The possible profit and loss opportunities for investor

Profit is when the stock price at maturity is below the call price and premium paid

Maximum loss = Premium paid

jeff jeffy answered 1 year ago
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