Historical stock prices of Harrington Corp. were given in the following table. N

Question

Historical stock prices of Harrington Corp. were given in the

following table. No dividends were paid for any of these years.

Time Stock price

January, 2012 $100

January, 2013 $80

January, 2014 $75

January, 2015 $120

January, 2016 $100

In 2014, what was the payoff of 1 long call option (100 shares) with an $80/share strike

price and a $4/share premium?

a. $400

b. –$7,500

c. $500

d. –$400

In 2014, what was the payoff of 1 long call option (100 shares) with an $80/share strike price and a $4/share premium? iice and a 4/share premiuin a.$400 b. $7.500 C. $500 100

Explanation / Answer

The call option is profitable only when the stock pice is higher than the strike price and the premium cost included on the day of expiry. As from 2014 to 2015, the price has fallen from $80 to $75, the price of call option of strike price $80 must have been reduced to zero on the day of expiry. Cot of 1 long call option = 4*100= $400.

Thus the payoff is -400 dollars

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