Question: Question 3: 8 marks The diagram below represents the payoff of a European call option on stock with strike price (K)= $100, initial cost (option

Question 3: 8 marks

The diagram below represents the payoff of a European call option on stock with strike price (K)= $100, initial cost (option premium) =$10 and option life of 6 months. The market price of the underlying stock reaches ($115) at maturity date of the option, explain in details: -

1) Whether the holder of this option will exercise his option? (4 marks)

Calculate the final payoff if this option is exercised. (4 marks)

-10 premium

100

110

120

130

Profit ($)

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