Francis is interested in becoming a shareholder of Suncor Inc. but believes that Suncor Inc. shares are undervalued in relation to the financial performance and development prospects of the global energy sector.

Francis plans to acquire options on Suncor shares to take advantage of his expectations. On March 1, 2019, Suncor shares are worth $45.60. On the same day, the European call option associated with that stock is worth $2.00, with an expiration date of May 31, 2019 and an exercise price of $48.00.

 

A.            What are the expectations of Francis, the buyer of the call?

B.            What is the break-even point for the transaction?

C.            If on May 31, 2019, the stock is trading at $54.00, what will be the payoff for Francis?

D.            Graphically determine the buyer's payoff profile as a function of the change in Suncor's stock price (varying the price from $40.00 to $60.00).

Answer rating: 100% (QA)

A The expectations of Francis the buyer of the call are that the price of Suncor shares will increas... View the full answer