Question
Suppose that a financial institution has sold for $300,000 a European call option on 100,000 shares of a non-dividend stock. Assume that the stock price
Suppose that a financial institution has sold for $300,000 a European call option on 100,000 shares of a non-dividend stock. Assume that the stock price is $49, the strike price is $50, the risk-free interest rate is 5% per annum, the stock price volatility is 20% per annum, the time to maturity is 20 weeks (0.3826 years), and the expected return from the stock is 13% per annum.
(b) (Strategy 1) The financial institution decides to do nothing but deposit $300,000 in a risk-free bank. Then calculate the profit (or cost) of the financial institution at maturity in case when after 20 weeks (i) the stock price is $40 or (ii) the stock price is $60.
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