Question

MdllingsReview View Help Te 4. Consider a call option with one year time remaining to expiration and the table below (15 pts) Time Now Later Stock Price 32 29 Call Exercise Price 30 30 Call 4 Provide the result of the covered call writing strategy in the table below in the context of marking to market only. Write as to what you are doing in each block and show numbers. Time Stock Position Call Option PositionNet or combined position Now Action: Action: Result: 6 monthsAction: later Action: Result: Results in S Results in %

Answer 1

Solution.

Call Option:- an option to buy assets at an Agreed Price(Strike Price or Exercise Price) on or before particular Date.

Exercise Price(Strike Price)- Exercise price of an option is the fixed price at which the owner of the option can buy (in case of a call option ) or sell (in the case of a put option),the underlying security or commodity.

Call Premium:- is the amount that the purchaser of a call option must pay the call writer.

Mark to Market:- MTM is a measure of the the fair value of accounts that can change over time, such as assets and liabilities. MTM aims to provide a realistic position of a company.

Call option Position:- Call option are an agreement that give the option buyer the right but not the obligation to buy a stock ,bond etc.

Time	Stock Position	Call Option Position	Net or Combined Position
Now	Stock Price = 32 Since Stock Price More than  the Exercise Price. hence call option is exercised. Stock Position= 32	Exercise Price=30 Call Premium=4	Net= Stock Price-(Exercise price+call Premium) Loss= 32-(30+4)=(2)
6 Month Letter	Stock Price= 29 Since Stock Price is less than Exercise Price .hence call option not valuable. Maximum loss will be call premium i.e 1/- Stock Position= 29	Exercise Price=30 Call Premium=1	Loss = (1)
Result in $	Decrease in Stock Position(in $)= 3
Result in %	Decrease in Stock Position(in %)= 9.37%