A particular call is the option to buy stock at $25. It expires in six months an

Question

A particular call is the option to buy stock at $25. It expires in six months and cur- rently sells for $4 when the price of the stock is $26. a) b) 2. What is the intrinsic value of the calle What is the time premium paid for the calla What will the value of this call be after six months if the price of the stock is $20? $25? $30? $40? If the price of the stock rises to $40 at the expiration date of the call, what is the percentage increase in the value of the call? Does this example illustrate favorable leverage? c) d) If an individual buys the stock and sells this call, what is the cash outflow (i.e., net cost) and what will the profit on the position be after six months if the price of the stock is $10? $15? $20? $25? $26? $30? $40? If an individual sells this call naked, what will the profit or loss be on the position after six months if the price of the stock is $20? $26? $40? e)

Explanation / Answer

2)a)Strike price=$25.

Intrinsic value=$26-25=$1

Time premium=$4-1=$3.

b)If price is $20, value of call=20-25=-5

If Price is 25,value of call=25-25=0

If price is 30,value of call =5

If price is 40,value of call =15

c)Increase in the value of call =15-4/4=2.75%

d)Cash outflow=$4-26=$-22.

If price is 10, profit=-12

If price is 15,profit is -7

If price is 20, profit =-2

If price is 25, profit=$3

If price is 26,profit is 4.

If price is 30, profit is 8

If price is 40, profit is 12.

Thank you.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.