Suppose the effective annual interest rate is 5% and Hunter Company’s stock curr

Question

Suppose the effective annual interest rate is 5% and Hunter Company’s stock currently trades for $95 per share. Suppose the premium for a 1-year $90-strike call option on the stock is $20.71, and the premium for a $90-strike put is $11.42. What is the profit earned on a written $90-strike straddle if Hunter’s stock is worth $86.40 when the options expire? (You may assume the stock pays no dividends over the next year.)

$30.14

$6.15

$26.54

$30.14

$30.56

$–3.60

Suppose the effective annual interest rate is 5% and Hunter Company’s stock currently trades for $95 per share. Suppose the premium for a 1-year $90-strike call option on the stock is $20.71, and the premium for a $90-strike put is $11.42. What is the profit earned on a written $90-strike straddle if Hunter’s stock is worth $86.40 when the options expire? (You may assume the stock pays no dividends over the next year.)

Selected Answer: c.

$30.14

Answers: a.

$6.15

b.

$26.54

c.

$30.14

d.

$30.56

e.

$–3.60

Explanation / Answer

Option C is correct.

Calculation -

Premium on writting Put and call option = $20.71 + $11.42

= $32.13

Interest on premium 32.13 * 5 %

= 1.6065

Profit = 33.7365 - (90-86.4)

= $30.14

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