Find the break-even stock price

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Reference no: EM132114295

Financial Derivatives and Risk Management Homework -

1. This is September, and you have $4,000 to invest for three months. The stock price is currently $40. A December call option with a $40 strike price is currently selling for $4. You have two strategies:

a) Buy 100 shares

b) Buy 10 call options (each call option has 100 shares)

(1) Please evaluate the two strategies and fill out the blanks in the following table.

Stock Price at Maturity (in December)	Net Profit at Maturity
Stock Price at Maturity (in December)	Strategy a): Buy 100 shares	Strategy b): Buy 10 calls
25
30
35
40
45
50
55

(2) Find the break-even stock price (i.e., the stock price at which the two strategies yield the same payoff).

(3) Draw a diagram to illustrate.

Reference no: EM132114295

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