Question
a. The price of a four-month ARL call option with an exercise price of R135 is R6. The current price of ARL stock is R140
a. The price of a four-month ARL call option with an exercise price of R135 is R6. The current price of ARL stock is R140 per share. If the price of ARL stock at expiration is R146, calculate the following: (Assume each contract is 100 shares of stock) i. Payoff to the call holder? (1 mark) ii. Payoff to the call writer? (1 mark) iii. Profit to the call holder? (1 mark) iv. Profit to the call writer? (1 mark)
b. An investor buys a two-month XYZ call option contract with a $25 strike price and sells a two-month XYZ call option contract with a $30 strike price. The premium is $2 for the call with the $25 strike price. The premium is $1 with the call for the $30 strike price. i. What is name of this option strategy? (1 mark) ii. What is the maximum potential profit for this position? (3 marks) iii. Draw the payoff and profit for this position (make sure to label your graph) (4 marks)
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