Question

Investor A sells a three-month European call option on 100 shares of a stock with a...

Investor A sells a three-month European call option on 100 shares of a stock with a strike price of $40 per share and collects a total of pays a total of $500 premium. Investor B longs a 3-month forward contract on100 shares of the same stock at a forward price of $40 per share. At which stock price in three months will these two investors have the same profit or loss? (please enter only a number without the $ sign)

Homework Answers

Answer #1

Call is an option, if the share price increases then you get cash inflows, if the share price falls below strike then the option lapses.

If the stock price falls below to $35, then for Investor A the option will lapse and the total loss will be the premium paid, that is $500. For Investor B, so he was long the forward contract, so if share price falls below $40 he will start making loses. As share price is $35, so he will lose $5 per share. As 100 shares, so total $500.

So at the share price $35, both investors loss will be $500.

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