Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Assume a stock with an option with the information as
follows.
• Stock purchased price was $113.
• Call option on the stock was purchased at $4.
• Call option has strike price at $115.
• the stock price is $117on expiration date
Please explain the Call Options Payoff Diagrams below, why it plot like this (please explain step by step) .
Thank you for your answering

Transcribed Image Text:Call Options Payoff Diagrams
• Buyer's perspective (you are the buyer)
profit
$4
$2
113 115 117 119
Payoff per share
Stock Price
on expiration
underlying price
$4
$2
-$2
-$4
premium
strike P. 115
If on expiration date,
the price is $117, you exercise
because it will enable you
to buy stock at cheaper
price (gain 12-$4= -2)
113 115 117 119
Limited
loss
unlimited
gain
To less less
than initial
$4
Stock Price
we don't know
stock price in
the future (The
higher the stock
price, the more
profit you earn)
Profit/Loss per share
Expert Solution

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