Question 19. (4 marks, 1 mark for each part)

The current price of a share of stock is $40 and 6-month European call options on the stock

with an exercise price of $41 are currently selling for $4. An investor is trying to decide between buying 100 shares or buying 1,000 call options on the stock (10 contracts). Both strategies will involve investing $4,000.

Identify the profit/loss for both strategies at the end of 6 months as a function of the stock price ST.

Draw the profit/loss diagram for both strategies.

Identify the stock price at which both strategies are equally profitable.

For what range of the stock price is the option strategy more profitable?