Question
DEF Corp is currently trading at $38/share. Consider an option trading strategy consisting of: 1. A long European call on DEF with a strike price
DEF Corp is currently trading at $38/share. Consider an option trading strategy consisting of:
1. A long European call on DEF with a strike price of $50, trading at $3.50
2. A long European put on DEF with strike price of $40, trading at $5
a) What are the intrinsic and time value of the call and put?
b) Draw a profit diagram for each option as well as the overall strategy (neat and labelled)
c) Construct the payoff table and profit, max potential loss, and breakeven points (there are 2)
d) If the stock price turns out to be $60 at the maturity date, what is the profit on the strategy?
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