You have purchased a call option contract on Johnson & Johnson common stock. The option has an
Question:
a. Calculate your net profit on the option contract if J & J’s stock price rises to $ 94.00 and you exercise the option.
b. Calculate your net profit on the option contract if J & J’s stock price falls to $ 89.50 and you exercise the option.
c. If J & J’s stock price falls to $ 89.50 show that it is more profitable to exercise than not exercise the option you have purchased.
Step by Step Answer:
a Purchase option 217 x 100 shares Buy stock by exercising option ...View the full answer
Financial Markets and Institutions
ISBN: 978-0077861667
6th edition
Authors: Anthony Saunders, Marcia Cornett
Related Video
A call option is a type of financial contract that gives the holder the right, but not the obligation, to buy an underlying asset (such as a stock, commodity, or currency) at a specified price (called the strike price) within a specified period of time. When an investor purchases a call option, they are essentially betting that the price of the underlying asset will rise above the strike price before the option\'s expiration date. If the price of the asset does rise above the strike price, the investor can exercise the option by buying the asset at the strike price and then selling it at the higher market price, thereby earning a profit. Call options are often used as a speculative investment strategy, as they allow investors to potentially profit from the upward movement of an asset without having to actually own the asset itself. They are also commonly used as a hedging tool to protect against potential losses in a portfolio.
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