Suppose that a European call option to buy a share for $40.00 costs $4.00 and is held until maturity.
A) Under what circumstances will the holder of the option make a profit?
B) Under what circumstances will the option be exercised?
C) What is the stock price at which the holder makes no profit or loss?
D) Draw a diagram illustrating how the profit from a long position in the option depends on the stock price at maturity of the option.
E) Draw a diagram illustrating how the profit for the writer of the option a short position in the option depends on the stock price at maturity of the option.