Question
Suppose that you own a call option on a non-dividend paying stock with a strike price of $40 that will expire in three months. The
Suppose that you own a call option on a non-dividend paying stock with a strike price of $40 that will expire in three months. The current stock price is $60, and the three-month risk-free rate of interest is 4% with continuous compounding. Suppose that you short the stock and invest the proceeds for three months. What is the value of your combined position in the call, the stock, and the investment in three months if the stock price is greater than $40? What is the value of your combined position as a function of the stock price in three months if the stock price is less than $40?
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