can someone please explain how to work this problem, thank you. Suppose you shor

Question

can someone please explain how to work this problem, thank you.

Suppose you short-sell a stock (which pays no dividends) for $40 and buy a $40-strike call option for $10.22. Assuming the effective annual interest rate is 9%, what is the profit on your position if the stock is worth $43.20 when the option expires? Selected Answer: d. $–10.22 Answers: a. $–7.37 b. $–10.74 c. $–7.54 d. $–10.22 e. $3.60 Question 8 Suppose you short-sell a s ock1 Solectod Angwer sch pavs no dividends) or S40 and buy a S40 strike call option or S 10.22. Assuming the e 00? of 1 point e trve annual interest rate s 9%. whats the profit on your position if the stock is worth S43.20 when the option expires? O d S-10.22 Answers $-7.37 ?. b?$-10,74 $-7.54 d S-10.22 $3.60

Explanation / Answer

If you short sell a share, You recive $ 40 & Bought a call Option

For which you nee d to pay $ 10.22 as Premium

Net Amount in hand = $ 40 - $ 10.22 i.e 29.78

Invest this amount per anum @9%

Maturity AMount = Investment * (1+r)

= $ 29.78 * 1.09

= $ 32.46

after 1 Year even though market rate is 43.20, by exercising call option you can purchase the share for $ 40 & can clearoff the short sale position.

Thus after a year you need to Pay $ 40 & you have maturity amount of $ 32.46 leading to loss of [ 32.46 -40 ] $ 7.54

Pls comment, if any further assistance is required.

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