Question

Both a call and a put currently are traded on stock XYZ, both have strike prices of $35 and expirations of 6 months. a. What will be the profit to an investor who buys the call for $4.5 in the following scenarios for stock prices in 6 months? (0) $40; (ii) $45; (iii) $50; (iv) $55: (V) $60. (Leave no cells blank - be certain to enter "0" wherever required. Negative amounts should be indicated by a minus sign. Round your answers to 1 decimal place.) Stock Price Profit IS 401 ii. $ 45 iii. S 50 iv. S 55 v. S 60 b. What will be the profit to an investor who buys the put for $5.5 in the following scenarios for stock prices in 6 months? (0) $40; (ii) $45; (iii) $50; (iv) $55: (V) $60. (Leave no cells blank - be certain to enter "0" wherever required. Negative amounts should be indicated by a minus sign. Round your answers to 1 decimal place.) Stock Price Profit I. ii. S iv. v. $

Answer 1

ANSWER:

Profit To Investor who buys call = Payoff - Premium Paid

Payoff = max{ST - K,0}

K= $35

Premium Paid = $4.5

ST	Payoff	Profit
$ 40	max{40-35,0} = 5	= 5 - 4.5 = $0.5
$ 45	max{45-35,0} = 10	= 10 - 4.5 = $5.5
$ 50	max{50-35,0} = 15	= 15 - 4.5 = $10.5
$ 55	max{55-35,0} = 20	= 20 - 4.5 = $15.5
$ 60	max{60-35,0} = 25	= 25 - 4.5 = $20.5

Profit To Investor who buys put= Payoff - Premium Paid

Payoff = max{K-ST , 0}

K= $35

Premium Paid= $5.5

ST	Payoff	Profit
$ 40	max{35 - 40, 0} = 0	= -$5.5
$ 45	max{35 - 45, 0} = 0	= -$5.5
$ 50	max{35 - 50, 0} = 0	= -$5.5
$ 55	max{35 - 55, 0} = 0	= -$5.5
$ 60	max{35 - 60, 0} = 0	= -$5.5

As payoff is Zero, this means the investor doesn't exercise the put option. He chooses to sell the stock in the Open Market.