Question

Both a call and a put currently are traded on stock XYZ; both have strike prices of $55 and maturities of six months. a. What will be the profit/loss to an investor who buys the call for $4.50 in the following scenarios for stock prices in six months? (Loss amounts should be indicated by a minus sign. Round your answers to 2 decimal places.) Stock Price $ 45 $ 50 55 60 65 Profit/Loss $ (14.50) $ (9.50) $ (4.50) $ 0.50 $ 5.50 b. What will be the profit/loss in each scenario to an investor who buys the put for $6.50? (Loss amounts should be indicated by a minus sign. Round your answers to 2 decimal places.) Stock Price $ 45 $ 50 55 60 65 Profit/Loss $ (16.50) $ (11.50) $ (6.50) $ (1.50) $ 3.50

Answer 1

Call option is the right to buy a specified security for a specified price on a future date
Put option is the right to sell a specified security for a specified price on a future date
Call option is exercised when the market price is higher than the strike price
Put option is exercised when the strike price is higher than the market price
	Stock Price	Exercised?	Profit/Loss
a.	45	No	-4.5
b.	50	No	-4.5
c.	55	Indifferent	-4.5
d.	60	Yes	0.5
e.	65	Yes	5.5
b.Put Option
	Stock Price	Exercised?	Profit/Loss
a.	45	Yes	3.5
b.	50	Yes	-1.5
c.	55	Indifferent	-6.5
d.	60	No	-6.5
e.	65	No	-6.5