Question

The following prices are available for call and put options on a stock priced at $50....

The following prices are available for call and put options on a stock priced at $50. The risk-free rate is 6 percent and the volatility is 0.35. The March options have 90 days remaining and the June options have 180 days remaining.

Strike March (calls) June (calls) March (puts) June (puts)
45 6.84 8.41 1.18 2.09
50 3.82 5.58 3.08 4.13
55 1.89 3.54 6.08 6.93

Use this information to answer the following questions. Assume that each transaction consists of one contract for 100 shares. Consider a bull call spread using the March 45/50 calls. A bull call spread consists of one long call with a lower strike price and one short call with a higher strike price. Also, Briefly discuss why you would use a bull call spread in terms of risk?

a. How much will the spread cost?

b. What is the maximum profit on the spread? Maximum loss?

c. What is the profit or loss if the stock price at expiration is $47?

d. What is the breakeven point?

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