Consider a stock priced at $30 with a standard deviation of 0.3. The risk-free rate is 0.05. There are put and call options available at exercise prices of 30 and a time to expiration of six months. The calls are priced at $2.89 and the puts cost $2.15. There are no dividends on the stock and the options are European. Assume that all transactions consist of 100 shares or one contract (100 options). Use this information to answer questions 1 through 10.

1. What is your profit if you buy a call, hold it to expiration and the stock price at expiration is $37?

a. $700

b. -$289

c. $2,711

d. $411

e. none of the above

2. What is the breakeven stock price at expiration on the transaction described in problem 1?

a. $32.89

b. $30.00

c. $27.11

d. $32.15

e. there is no breakeven

3. What is the maximum profit on the transaction described in problem 1?

a. $2,711

b. infinity

c. zero

d. $3,289

e. $3,000

4. What is the maximum profit that the writer of a call can make?

a. $2,711

b. $289

c. $3,000

d. $3,289

e. none of the above

Answer rating: 100% (QA)

The call option is the option that gives the right to the call buyer to purchase a specific security on a specific date at a specific price It is an a... View the full answer