Realize a loss at expiration that is unbounded

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The seller of a European call may potentially realize a loss at expiration that is unbounded. However, a seller of a call may protect against this unbounded loss by purchasing the stock. In this case, the loss is bounded at say, M. Compute the value of M. Assume the interest rate r is 0, the initial price of the stock is S, the price of the call is C, and that S > C. (Hint: assume you have no position at time t = 0. Now sell the call and buy the stock. Since S > C, you must borrow the amount (S - C) to complete this transaction. At expiration, you must pay back (S - C) by selling your unit of stock).

Reference no: EM132332044

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