Question
The current spot price of a stock is $100 per share, and the risk-free rate is 5%. The stock pays no dividends and costs nothing
The current spot price of a stock is $100 per share, and the risk-free rate is 5%.
The stock pays no dividends and costs nothing to store.
The forward price is $105.
An investor buys a one-year European-style call option on the same stock.
The strike is $110, and the premium is $5.
Complete the following table of payoffs from the long call position.
Spot price at Payoff, excluding Payoff, including
time 1 (S1) premium premium
$90 $0 - $5
$95 __________ ___________
$100 __________ ___________
$105 __________ ___________
$110 __________ ___________
$115 __________ ___________
$120 __________ ___________
$125 + $15 + $10
What is the price at which the investor breaks even after paying the call premium?
The breakeven on the call, including premium, is S1 = __________
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started