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4

4.A one-year call option on a stock with a strike price of $30 costs $3; a one-year put option on the stock with a strike price of $30 costs $4. Suppose that a trader buys two call options and one put option. The breakeven stock price below which the trader makes a profit is

A.$25

B.$28

C.$26

D.$20

A.$25

B.$28

C.$26

D.$20

Answer: D

When the stock price is $20 the two call options provide no payoff. The put option provides a payoff of 30−20 or $10. The total cost of the options is 2×3+ 4 or $10. The stock price in D, $20, is therefore the breakeven stock price below which the position is profitable because it is the price for which the cost of the options equals the payoff.

When the stock price is $20 the two call options provide no payoff. The put option provides a payoff of 30−20 or $10. The total cost of the options is 2×3+ 4 or $10. The stock price in D, $20, is therefore the breakeven stock price below which the position is profitable because it is the price for which the cost of the options equals the payoff.

Flashcard info:

Author: CoboCards-User

Main topic: Finance & Investment

Topic: Derivatives

Published: 27.10.2015