Question

# The price of a stock is \$40. The price of a one-year European put option on...

The price of a stock is \$40. The price of a one-year European put option on the stock with a strike price of \$30 is quoted as \$7 and the price of a one-year European call option on the stock with a strike price of \$50 is quoted as \$5. Suppose that an investor buys 100 shares, shorts 100 call options, and buys 100 put options.

a) Construct a payoff and profit/loss table

b) Draw a diagram illustrating how the investor’s payoff and profit or loss at expiation.

In the Quetion Actual Price of Stock after one year is not given. Assuming Actual Price of Stock after one year is \$ 45.

(if you have the actual price you can change figures accordingly)

 Particulars
 Inflow
 Outflow
 Pay off
 Profit/-loss
 \$4500
 \$4000
 \$500
 \$0
 \$500
 Short 100 Call
 \$0
\$0 \$0 \$500 \$500
\$0 \$0 \$0 -\$700 -\$700
 Net Profit
\$300

Note: at price of \$45 call option and put option are out of money. Therefore buyer of options will not excercise options.

b) Diagram illustrating how the investor’s payoff and profit or loss at expiation.

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