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Suppose that Newark Pension Fund purchased Sigmaco stock at the market price of $120 per share, and to hedge against what they think will be
Suppose that Newark Pension Fund purchased Sigmaco stock at the market price of $120 per share, and to hedge against what they think will be a temporary decline in Sigmaco's stock price, Newark sells call options on Sigmaco stock with an exercise price of $118 per share for a premium of $3 per share. Assume that Newark Pension Fund sells its shares at the expiration date no matter the market price at the time. Use the previous information to determine the prices Newark Pension Fund will sell Sigmaco's stock for, as well as the profit they earn, at each given expiration date market price. (Hint: Assume the call option will be exercised only if the expiration date market price is greater than or equal to the exercise price plus the call premium.)
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