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The current price of a stock is $40. The price of a one-year European put option on the stock with a strike price of $30
The current price of a stock is $40. The price of a one-year European put option on the stock with a strike price of $30 is quoted at $2 and the price of a one-year European call option on the stock with a strike price of $50 is quoted at $3.
- (2 points) Investor D wants to own the shares but wants to reduce his initial investment cost. So he buys the stock and shorts the call option on 100 shares.
- Draw a diagram illustrating how the investors profit varies with stock price. What are his max profit and max loss per share?
- Compute his dollar profit and return if the share price is $25, $42, or $56 in one year.
- (2 points) Investor E wants to bet on the possible share price fluctuations in the coming year. He buys the put option and the call option on 100 shares.
- Draw a diagram illustrating how the investors profit varies with stock price. What are his max profit and max loss per share?
- Compute his dollar profit and return if the share price is $25, $42, or $56 in one year.
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