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You spend many sleepless nights building cash flow models of Facebook Inc. (FB) and are convinced they are undervalued. The current spot price of FB is $204/share. You predict that in 6 months they will reach $240/share. Assume a 2% interest rate per annum. a) You buy a January 2020 call option (t=6 months) for $5.20/share with a strike price of $230/share. Draw a payoff and profit diagram of this position. b) Under what circumstances will you make money?

You spend many sleepless nights building cash flow models of Facebook Inc. (FB) and are convinced they are undervalued. The current spot price of FB is $204/share. You predict that in 6 months they will reach $240/share. Assume a 2% interest rate per annum. a) You buy a January 2020 call option (t=6 months) for $5.20/share with a strike price of $230/share. Draw a payoff and profit diagram of this position. b) Under what circumstances will you make money?

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
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You spend many sleepless nights building cash flow models of Facebook Inc. (FB) and are convinced they are undervalued. The current spot price of FB is $204/share. You predict that in 6 months they will reach $240/share. Assume a 2% interest rate per annum. a) You buy a January 2020 call option (t=6 months) for $5.20/share with a strike price of $230/share. Draw a payoff and profit diagram of this position. b) Under what circumstances will you make money?
Transcribed Image Text:You spend many sleepless nights building cash flow models of Facebook Inc. (FB) and are convinced they are undervalued. The current spot price of FB is $204/share. You predict that in 6 months they will reach $240/share. Assume a 2% interest rate per annum. a) You buy a January 2020 call option (t=6 months) for $5.20/share with a strike price of $230/share. Draw a payoff and profit diagram of this position. b) Under what circumstances will you make money?
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