Chapter 20, Problem 8PS

a.

Summary Introduction

To compute: The price of a 3-month call option on C.A.L.L. stock if the exercise price is $50 with a condition that no dividends will be paid.

Introduction:

Call option: It is an option that facilitates the buyer to buy the underlying assets at a fixed or agreed price irrespective of changes in market price during a specified period.

b.

Summary Introduction

To determine: The options strategy to be used when the convictions about the stock’s future movement have to be exploited and the direction of stock price movement.

Introduction: 

Straddle Strategy: It refers to a situation where both the options- call option and put options are sold. By doing this, the investor can avail of the benefit of earning a premium on both options.

c.

Summary Introduction

To compute: The net cost for the establishment of a balance between the call option, put option and the riskless lending.

Introduction: 

Riskless lending: This can also be termed as risk-free lending. The investor can lend money at a risk-free interest rate.