Assume an investor purchase 100 shares of stock at $44 per share and wish to hedge his position by writing a 100-share call option on your holdings. The option has a $40 strike price and a premium of $8.50. The stock is selling at $38 at the time of expiration.

Required:

1. Determine the overall dollar gain or loss on this covered option. (Consider the change in stock value as well as the gain or loss on the option.) Note that the stock does not pay a cash dividend. (5 marks)

2. Calculate the overall gain or loss if the stock ended up at:

1. $41
2. $25
3. $57
4. $70

[Disregard the stock being called away in parts i, ii, iii and iv. Assume you will repurchase the options.] (20 marks)