Financial Derivatives

Consider a stock priced at RM 10 with a standard deviation of 30%. The risk-free rate is 0.05. There are put and call options available at exercise prices of RM 10 and a time to expiration of 6 months. The calls are priced at 89 sen and the puts cost 25 sen. There are no dividends on the stock and the options are European.

Assume that all transactions consist of 1,000 shares or one contract (1,000 options). Use this information to answer the questions below.

a. What is your profit if you buy a call, hold it to expiration and the stock price at expiration is RM 17?

b. What is the break-even stock price on the transaction?

c. What is the maximum profit on the transaction described in part (a)?

d. What is the maximum profit that the writer of the call can make?