Question

Suppose a European call option to buy a share for $22.50 costs $1.75. The stock currently trades for $20.00. If the option is held to maturity under what conditions does the holder of the option, make a profit? Note: ignore time value of money. How would the answer change if this was an American call option?

Please show work

Answer #1

European call option will only make profit when share price at the maturity will be increasing=

(Purchase price + call option premium)

= (22.5+1.75)= $24.25

European call option can only be excercised at maturity and when it will exceed 24.25, then only it will make profit.

If the the call option was an American call option then, call option could have been exercised before maturity and if before the maturity the market price had increased over 24.25, the American call option would have led to profit.

An oil producer is interested in a European call option to buy a
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why.
Note: ignore the time value of money.

A trader sells a European call option on a share for 4 SEK. The
stock price is 47 SEK and the strike price is 50 SEK. Under what
circumstances does the trader make a profit? Under what
circumstances will the option be exercised? Draw a diagram showing
the variation of the trader’s profit with the stock price at the
maturity of the option.
Please carefully label: Breakeven point, profit, loss and don't
forget the diagram.. thanks in advance!

.
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$ 50 costs $ 2.50 and is held until March. Under what circumstances
will the holder of the option make a gain? Under what circumstances
will the option be exercised? Draw a diagram showing how the profit
on a long position in the option depends on the stock price at the
maturity of the option.

Suppose that a European put option has a strike price of $150
per share, costs $8 per share, and is held until maturity.
a) Under what circumstances will the seller of the option make a
profit?
b) Under what circumstances will the buyer exercise the
option?
c) Draw a diagram (or a table) illustrating how the profit from
a short position in the option depends on the stock price at the
maturity of the option.

Company A’s stock is currently selling at $200 per share. A
one-year American call option with strike price $50 trading on the
Acme options exchange sells for $75.
(1) How would you take this opportunity to make a profit?
(2) Suppose the option is a European call option instead, what
is your strategy to make a profit?

Xylem’s stock is currently selling at $200 per share. A one-year
American call option with strike price $50 trading on the Acme
options exchange sells for $75.
(1) (2 pts.) How would you take this opportunity to make a
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(2) (2 pts.) Suppose the option is a European call option
instead, what is your strategy to make a profit?

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does the investor make a profit? Under what circumstances will the
option be exercised? Explain how investors profit, according to the
variation of the stock price at the maturity of the option. (You
can explain by writing a simple formula of the profit, where X is
the stock price at maturity.

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Use put-call parity to explain how would you construct a
European...

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