You can buy a 6-month call contract (i.e., for 100 shares) with an exercise pric

Q: You can buy a 6-month call contract (i.e., for 100 shares) with an exercise pric

Note: Loss in $ is suject to maximum of $210, that premium paid. (A) Stock price at $85 Cost of Call Contract ($) After Six month Return in $ Retrun in % for 6 month Return in % for one year a= 2.10 x 100 b = ($85-$65)x100 c = b-a d= (c/a)x 100 e = d (12/6) 210 2000 1,790 852.38% 1704.76%

ID: 2727243 • Letter: Y

Question

You can buy a 6-month call contract (i.e., for 100 shares) with an exercise price of $65 for a cost of $2.10 *100. Assume the risk-free rate of return is 0%.

a. What is your dollar profit (loss) and percentage return if you purchase one call contract, and in 6 months ABC stock is selling for $85?

b. What is your dollar profit (loss) and percentage return if you purchase one call contract, and in 6 months ABC is selling for $45?

c. What is your dollar profit (loss) and percentage return if you purchase one call contract, and in 6 months ABC is selling for $25?

Explanation / Answer

Note: Loss in $ is suject to maximum of $210, that premium paid.

(A) Stock price at $85 Cost of Call Contract ($) After Six month Return in $ Retrun in % for 6 month Return in % for one year a= 2.10 x 100 b = ($85-$65)x100 c = b-a d= (c/a)x 100 e = d (12/6) 210 2000 1,790 852.38% 1704.76%

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You can buy a 6-month put contract (i.e., for 100 shares) with an exercise price

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You can buy a 6-month call contract (i.e., for 100 shares) with an exercise pric

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