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Assume that you have shorted the call option in Problem 2. a. If the stock is trading

Question:

Assume that you have shorted the call option in Problem 2.

a. If the stock is trading at $55 in three months, what will you owe?

b. If the stock is trading at $35 in three months, what will you owe?

c. Draw a payoff diagram showing the amount you owe at expiration as a function of the stock price at expiration.


Data from problem 2

You own a call option on Intuit stock with a strike price of $40. The option will expire in exactly three months’ time.

Strike Price
In finance, the strike price of an option is the fixed price at which the owner of the option can buy, or sell, the underlying security or commodity.
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Plan Value a short of the call if the stock is selling at 55 and 35 Draw a payoff diagram s...View the full answer


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Ehsan Mahmood
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Fundamentals of Corporate Finance

Fundamentals of Corporate Finance

ISBN: 978-0132148238

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Authors: Berk, DeMarzo, Harford

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A call option is a type of financial contract that gives the holder the right, but not the obligation, to buy an underlying asset (such as a stock, commodity, or currency) at a specified price (called the strike price) within a specified period of time. When an investor purchases a call option, they are essentially betting that the price of the underlying asset will rise above the strike price before the option\'s expiration date. If the price of the asset does rise above the strike price, the investor can exercise the option by buying the asset at the strike price and then selling it at the higher market price, thereby earning a profit. Call options are often used as a speculative investment strategy, as they allow investors to potentially profit from the upward movement of an asset without having to actually own the asset itself. They are also commonly used as a hedging tool to protect against potential losses in a portfolio.

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