Question

Investor A pays a total of $500 to buy a three-month European call option on 100 shares of a stock with a strike price of $40 per share. Investor B longs a 3-month forward contract on 100 shares of the same stock with 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)

Answer #1

Investor A pays a total of $500 to buy a three-month European call option on 100 shares of a stock with a strike price of $40 per share.

Investor B longs a 3-month forward contract on 100 shares of the same stock with a forward price of $40 per share.

If the stock price goes up, Investor B always makes more profit than Investor A because of the option premium paid by Investor A.

But, both investor A and investor B can have the same loss at a particular price.

Price = Strike price - total call option premium/100

Price = 40 - 500/100 = $35

If the stock price ends at $35, Investor A loses all his premium of $500

Investor B faces a loss of (40 - 35) * 100 = $500

**Answer : $35**

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