Question

Which of the following accurately describes a(the) characteristic(s) associated with the payoff of a trader who...

Which of the following accurately describes a(the) characteristic(s) associated with the payoff of a trader who went short on a call option on copper (on a per ton basis)?

As the market price per ton of copper goes up, the trader’s payoff increases
As the market price per ton of copper goes up, the trader’s payoff decreases
The trader’s payoff is unbounded (that is, it has no dollar limit)
Group of answer choices

a.More than one of statements I, II, and III is correct

b.Statement II. is correct

c.Statement I. is correct

d.Statement III. is correct

e.None of statements I, II, or III is correct

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Homework Answers

Answer #1

a.More than one of statements I, II, and III is correct

The trader has shorted a call option. This means that the trader has sold the right to buy copper at the strike price of the option.

Statement I is incorrect. The trader has sold the right to buy copper at the strike price of the option. If the price of copper goes up, the option buyer will exercise the option, and the trader will have a loss.

Statement II is correct. The trader has sold the right to buy copper at the strike price of the option. If the price of copper goes up, the option buyer will exercise the option, and the trader will have a loss.

Statement II is correct. The trader has sold the right to buy copper at the strike price of the option. There is no theoretical limit to the increase in the price of copper. Therefore, the trader's potential loss is unlimited.

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