Question

An oil producer is interested in a European call option to buy a
share for $135.00 costs $9.00. The stock currently trades for
$123.00. If the option is held to maturity under what conditions
does the holder of the option make a profit? **Explain
why.**

Note: ignore the time value of money.

Answer #1

Solution

Here if the spot price of the share is more than the strike price ,the holder of the call option can make a profit but it also depends on the amount by which the spot price exceeds the strike price as the investor will also have to couver the cost of buying the call option

Profit=Spot price-Strike price-Call option cost

Putting values

Profit=Spot price-135-9

Profit=Spot price-144

Thus from above equation we can see that ,in order to have a profit, the spot price of the share at the time of maturity must be greater than 144

Suppose a European call option to buy a share for $22.50 costs
$1.75. The stock currently trades for $20.00. If the option is held
to maturity under what conditions does the holder of the option,
make a profit? Note: ignore time value of money. How would the
answer change if this was an American call option?
Please show work

A trader sells a European call option on a share for 4 SEK. The
stock price is 47 SEK and the strike price is 50 SEK. Under what
circumstances does the trader make a profit? Under what
circumstances will the option be exercised? Draw a diagram showing
the variation of the traderâ€™s profit with the stock price at the
maturity of the option.
Please carefully label: Breakeven point, profit, loss and don't
forget the diagram.. thanks in advance!

Suppose that a European put option has a strike price of $150
per share, costs $8 per share, and is held until maturity.
a) Under what circumstances will the seller of the option make a
profit?
b) Under what circumstances will the buyer exercise the
option?
c) Draw a diagram (or a table) illustrating how the profit from
a short position in the option depends on the stock price at the
maturity of the option.

.
Suppose that a March call option on a stock with a strike price of
$ 50 costs $ 2.50 and is held until March. Under what circumstances
will the holder of the option make a gain? Under what circumstances
will the option be exercised? Draw a diagram showing how the profit
on a long position in the option depends on the stock price at the
maturity of the option.

An investor sells a European call on a share for $4. The stock
price is $47 and the strike price is $50. Under what circumstances
does the investor make a profit? Under what circumstances will the
option be exercised? Explain how investors profit, according to the
variation of the stock price at the maturity of the option. (You
can explain by writing a simple formula of the profit, where X is
the stock price at maturity.

Suppose that a 6-month European call A option on a stock with a
strike price of $75 costs $5 and is held until maturity, and
6-month European call B option on a stock with a strike price of
$80 costs $3 and is held until maturity. The underlying stock price
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maturities) are 10% per annum with continuous compounding.
Use put-call parity to explain how would you construct a
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An investor buys a European call on a share for $3. The stock
price is $40 and the strike price is $42.
a. Under what circumstances does the investor make a profit?
b. Under what circumstances will the option be exercised?
c. What is the potential loss for the investor?
d. Identify the variation of the investor's loss with the stock
price at the maturity of the option?

For a European call option and a European put option on the same
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the following is true?
A) Before expiration, only in-the-money options can have
positive time premium.
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that portfolio by long a call and hold certain amount of risk-free
bond.
C) Since both the call and the put are risky assets, the
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For a European call option and a European put option on the same
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purchase a call option with an exercise price of $28 and a premium
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