a. Consider an option selling for $4 in which the exercise price is $30 and the...

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a. Consider an option selling for $4 in which the exercise price is $30 and the price of the underlying is $25. Determine the value at expiration and the profit for the buyer under the following outcomes if the transaction was a call option: i The price of the underlying at expiration is $33 (2 marks) ii. The price of the underlying at expiration is $24 (2 marks) b. Determine the value at expiration and the profit for the buyer under the following outcomes if the transaction was a put option. i. The price of the underlying at expiration is $40 (2 marks) ii. The price of the underlying at expiration is $22 (2 marks) Amy owns 100 shares of ABC stock with a cost basis of $35 a share. The stock is currently trading at $54 a share. Amy believes the price of ABC stock will fall to $45 a share in the near future but over the longer term of 3 to 5 years, increase in value to $75 a share. Amy would like to benefit from the expected near-term decline if it occurs. Therefore, Amy writes a covered call at a strike price of $55 and a premium of $2. c. If the price declines to $45, what would be Amy's profit/loss? d. (5 marks) What is the maximum profit and loss Amy can incur from the call if exercised? (6 marks) What is the maximum profit Amy can incur from the call if not covered? (6 marks) a. Consider an option selling for $4 in which the exercise price is $30 and the price of the underlying is $25. Determine the value at expiration and the profit for the buyer under the following outcomes if the transaction was a call option: i The price of the underlying at expiration is $33 (2 marks) ii. The price of the underlying at expiration is $24 (2 marks) b. Determine the value at expiration and the profit for the buyer under the following outcomes if the transaction was a put option. i. The price of the underlying at expiration is $40 (2 marks) ii. The price of the underlying at expiration is $22 (2 marks) Amy owns 100 shares of ABC stock with a cost basis of $35 a share. The stock is currently trading at $54 a share. Amy believes the price of ABC stock will fall to $45 a share in the near future but over the longer term of 3 to 5 years, increase in value to $75 a share. Amy would like to benefit from the expected near-term decline if it occurs. Therefore, Amy writes a covered call at a strike price of $55 and a premium of $2. c. If the price declines to $45, what would be Amy's profit/loss? d. (5 marks) What is the maximum profit and loss Amy can incur from the call if exercised? (6 marks) What is the maximum profit Amy can incur from the call if not covered? (6 marks)

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Lets break down each part of the question Call Option i Price of the underlying at expiration is 33 ... View the full answer