Suppose the stock price is $40 and the effective annual interest rate is 8%. a. Draw on

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Suppose the stock price is $40 and the effective annual interest rate is 8%.

a. Draw on a single graph payoff and profit diagrams for the following options:

(i) 35-strike call with a premium of $9.12.

(ii) 40-strike call with a premium of $6.22.

(iii) 45-strike call with a premium of $4.08.

b. Consider your payoff diagram with all three options graphed together. Intuitively, why should the option premium decrease with the strike price?

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Derivatives Markets

ISBN: 9789332536746

3rd Edition

Authors: Robert McDonald

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Question Posted: Aug 12, 2015 02:30 AM

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Suppose the stock price is $40 and the effective annual interest rate is 8%. a. Draw on

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a In order to be able to draw profit diagrams we need to find the future values of the call premia T...View the full answer

Derivatives Markets

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