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Essentials Of Investments
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
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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

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
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
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