Terence Boyle is considering buying 1000 shares of GHB Corporation at €31 per share. Because he has read that the firm will probably soon receive certain large orders from abroad, he expects the price of GHB to increase to €35 per share.

As an alternative, Terence is considering purchase of a call option for 100 shares of GHB at a strike price of €30. The 90-day option will cost €300. Ignore any brokerage fees or dividends.

a. What will Terence’s profit be on the stock if its price does rise to €35?

b. How much will Terence earn on the option if the stock price rises to €35?

c. How high must the stock price rise for Terence to break even on the option?

d. Compare, contrast, and discuss the relative profit and risk associated with the stock and the option transactions.