Question

Suppose you short-sell a stock (which pays no dividends) for $80 and buy a $75-strike call option for $17.53. Assuming the effective annual interest rate is 6%, what is the profit on your position if the stock is worth $91.20 when the option expires?

A) $-24.98

B) $-9.32

C) $9.80

D) $-8.78

E) $-12.53

Answer 1

you short sell stock and receives $80.

you purchase call option at a premium of $17.53

so you receive net amount = $80 - $17.53 = $62.47

This amount is invested @6%

so at the time of expiry, you will receive = $62.47*(1+0.06) = $66.22

when the option expires, the stock is worth $91.20, so call option is valued at $91.20 - $75 = $16.2

and the stock has to be purchased at $91.20

so profit on position = $66.22 - $91.20 + $16.2= -$-8.78

so answer is : D) -$8.78