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A call option provides a payoff at time T of max(ST - K, 0) yen, where ST

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A call option provides a payoff at time T of max(ST - K, 0) yen, where ST is the dollar price of gold at time T and K is the strike price. Assuming that the storage costs of gold are zero and defining other variables as necessary, calculate the value of the contract.

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Options Futures and Other Derivatives

Options Futures and Other Derivatives

ISBN: 978-0134472089

10th edition

Authors: John C. Hull

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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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