Chapter 21, Problem 3P

Summary Introduction

Call option:

A call option can be defined as an agreement that gives the right to an investor to purchase a stock, commodity or other instrument at a certain price within a definite time period. However, the right is not an obligation.

Strike price:

Strike price can be defined as the price at which a derivative may be exercised.

(a)

To determine: The payoff of the call.

(b)

Summary Introduction

To determine: The payoff of the call.

(c)

Summary Introduction

To show: A payoff diagram representing the value of the call at expiration as a function of the stock price at expiration.