1.An investor buys a call option on EBAY with a strike price 9.0, and a call pre

Question

1.An investor buys a call option on EBAY with a strike price 9.0, and a call premium of 4. If EBAY expires at 21, what profit did the investor make? Each option covers 100 shares of the underlyingstock.

2.A steak house takes a long position on cattle futures to limit its risk in the case of a cattle price increase. Six months later the steak house wants to eliminate its obligation under this position before the futures contracts expire. What should the steak house do?

a Buy Cows

b Sell cows in the spot market.

c Deliver Cows to the Chicago Board of Trade

d Take a short cattle futures contract position to offset the long position

Explanation / Answer

1)

strike price , K = 9

call premium , c = 4

price of EBAY at expiry , p = 21

no. of shares n = 100

profit = (p-c-K)*n = (21-4-9)*100 = 800

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