Consider a stock priced at $33 with a standard deviation of 0.3. The risk-free rate is 0.05. There are put and call options available at exercise prices of 35 and a time to expiration of six months. The calls are priced at $2.39 and the puts cost $2.05. There are no dividends on the stock and the options are European. Assume that all transactions consist of 100 shares or one contract (100 options). Suppose the investor constructed a covered call. If the transaction is closed out when the option has three months to go and the stock price is at $39, what is the investor's profit?
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Consider a stock priced at $33 with a standard deviation of 0.3. The risk-free rate is 0.05. There are put and call options available at exercise prices of 35 and a time to expiration of six months. The calls are priced at $2.39 and the puts cost $2.05. There are no dividends on the stock and the options are European. Assume that all transactions consist of 100 shares or one contract (100 options). Suppose the investor constructed a covered call. If the transaction is closed out when the option has three months to go and the stock price is at $39,
what is the investor's profit?
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