Financial Derivatives and Risk Management Homework -
This is September, and you have $4,000 to invest for three months. The stock price is currently $40. A December call option with a $40 strike price is currently selling for $4. You have two strategies:
a) Buy 100 shares
b) Buy 10 call options (each call option has 100 shares)
(1) Please evaluate the two strategies and fill out the blanks in the following table.
|
Stock Price at Maturity (in December)
|
Net Profit at Maturity
|
|
Strategy a): Buy 100 shares
|
Strategy b): Buy 10 calls
|
|
25
|
|
|
|
30
|
|
|
|
35
|
|
|
|
40
|
|
|
|
45
|
|
|
|
50
|
|
|
|
55
|
|
|
(2) Find the break-even stock price (i.e., the stock price at which the two strategies yield the same payoff).