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All main topics / Finance & Investment / Derivatives / Derivatives
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
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.
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Flashcard info:
Author: CoboCards-User
Main topic: Finance & Investment
Topic: Derivatives
Published: 27.10.2015

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