An investor buys a ratio spread of 1-year European calls. He buys 1 call option with...
An investor buys a ratio spread of 1-year European calls. He buys 1 call option with strike price 40 and sells 2 call options with strike price 50. Option prices are
|
Strike price |
Call option premium |
|
40 |
10 |
|
50 |
5 |
Determine the investor's profit if the ending price of the underlying stock is (a) 45, (b) 55, (c) 65. (math Finance)
Homework Answers
| Strike price | Call option premium | No. of call option | Premium received/(Paid) | ||
| 40 | 10 | 1 | (10) | ||
| 50 | 5 | 2 | 10 | ||
| Net Premium | 0 | ||||
| Sl. No | Share price | Strike price | Option exercised or lapsed | Payoff(Share price - Strike price) | Profit(Payoff-Net Premium) |
| a | 45 | 40 | Exercised | 5 | 5 |
| 50 | Lapsed | - | |||
| b | 55 | 40 | Exercised | 15 | 5 |
| 50 | Exercised | (10) | |||
| c | 65 | 40 | Exercised | 25 | (5) |
| 50 | Exercised | (30) |
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