Question

1. This is September, and you have $4,000 to invest for three months. The stock price is currently $40. A December call option with a $40 strike price is currently selling for $4. You have two strategies:

Buy 100 shares

Buy 10 call options (each call option has 100 shares)

(1)Please evaluate the two strategies and fill out the blanks in the following table.

Stock Price at Maturity (in December)	Net Profit at Maturity
	Strategy a): Buy 100 shares	Strategy b): Buy 10 calls
25
30
35
40
45
50
55

(2)Find the break-even stock price (i.e., the stock price at which the two strategies yield the same payoff).

(3)Draw a diagram to illustrate.

Answer 1

Answer 1

Stock Price At maturity	Buy 100 share	Buy 10 calls
25	(25-40)*100=-1500	Not Exercised (4*10)=-40
30	(30-40)*100=-1000	Not Exercised (4*10)=-40
35	(35-40)*100=-500	Not Exercised (4*10)=-40
40	(40-40)*100=0	Not Exercised (4*10)=-40
45	(45-40)*100=500	Exercised ((45-40)*(10*100))-40=4960
50	(50-40)*100=1000	Exercised ((50-40)*(10*100))-40=9960
55	(55-40)*100=1500	Exercised ((55-40)*(10*100))-40=14960

Answer 2

39.60 is break even point here both the strategy yield loss of $40.

Buy 100 Share:-

(39.60)*100=40 loss

Buy 10 call:-

Not exercised

4*10=40 loss

Answer 3

In diagram horizontal line represent price where 1 is 10, 2 is 20, 3 is 30 as so on. diagrame is uploaded as image saperately