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Problem 16-10

In mid-May, there are two outstanding call option contracts available on the stock of ARB Co.:

Call #	Exercise Price		Expiration Date		Market Price
1	$53		August 19		$8.60
2	60		August 19		3.14

1. Assuming that you form a portfolio consisting of one Call #1 held long and two Calls #2 held short, complete the following table showing your intermediate steps. In calculating net profit, be sure to include the net initial cost of the options. Do not round intermediate calculations. Round your answers to the nearest cent. Use a minus sign to enter negative values, if any. If the answer is zero, enter "0".

   Price of ARB Stock at Expiration ($)	Profit on Call #1 Position		Profit on Call #2 Position		Net Profit on Total Position
   40	$		$		$
   45	$		$		$
   50	$		$		$
   55	$		$		$
   60	$		$		$
   65	$		$		$
   70	$		$		$
   75	$		$		$

2. Choose the correct graph the net profit relationship in Part a, using stock price on the horizontal axis.

   The correct graph is -Select-graph Agraph Bgraph Cgraph DItem 25 .

3. What are the breakeven stock prices? What is the point of maximum profit? Do not round intermediate calculations. Round your answers to the nearest cent.

   The first breakeven point: $

   The second breakeven point: $

   The point of maximum profit: $

4. Under what market conditions will this strategy (which is known as a call ratio spread) generally make sense? Does the holder of this position have limited or unlimited liability?

   The user of this position is betting on -Select-lowhighItem 29 volatility. The holder has -Select-limitedunlimitedItem 30 liability for substantial price declines and -Select-limitedunlimitedItem 31 liability for substantial price increases.

A. 12 18 14 40 45 50 65 60 69 70 75 -4 F-8 L-12 B. 12 18 14 40 45 50 55 60 65 70 75 1-4 F-8 (-12 c. H2 N B 4 + 40 45 50 55 60 70 75 --4 F-8 (-12 D. 1 2 B 4 + 40 + 45 50 55 60 65 70 75 F-4 F-8 (-12