In class, you have learned that the break-even price for a call option is X +...

 

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In class, you have learned that the break-even price for a call option is X + premium. Given that most of Finance formula does not drop out from the sky (i.e. there is a reason why the formula looks the way it does) and that your knowledge will have more sticking power if you know the WHY, answer the following: (1) What is the break-even price for a long call? (2) What is the break-even price for a short call? (3) If your answer for (1) is different from (2), explain WHY they are different. If your answer for (1) is the same as (2), explain WHY they are the same. (4) Beginning with the formula to calculate profit and loss of a put, DERIVE the break-even price formula in (1). NOTE: DERIVE in mathematics means that you obtain (a function or an equation) from another by a sequence of LOGICAL STEPS. This means I am expecting to see mathematical manipulations (and not plain English discussion) for this DERIVATION part. In class, you have learned that the break-even price for a call option is X + premium. Given that most of Finance formula does not drop out from the sky (i.e. there is a reason why the formula looks the way it does) and that your knowledge will have more sticking power if you know the WHY, answer the following: (1) What is the break-even price for a long call? (2) What is the break-even price for a short call? (3) If your answer for (1) is different from (2), explain WHY they are different. If your answer for (1) is the same as (2), explain WHY they are the same. (4) Beginning with the formula to calculate profit and loss of a put, DERIVE the break-even price formula in (1). NOTE: DERIVE in mathematics means that you obtain (a function or an equation) from another by a sequence of LOGICAL STEPS. This means I am expecting to see mathematical manipulations (and not plain English discussion) for this DERIVATION part.