Problem 3

An investor purchases a stock for $24 and writes a call option on the same stock with an exercise price of $28 for a

premium of $2 per share. The call option expires in one year. Assume that the stock pays no dividends, there are no

transaction costs, and the investor will sell the stock in one year, exactly when the option expires.

a) What is the maximum profit the investor can earn on the combined "covered call" position?

b) What is the lowest possible profit from the combined investment?

c) It is now exactly one year later and the investor tells you that her profit on the combined "covered call" position

is $0. What is the stock price based on this information?