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Suppose that a European call option to buy a share for $100.00 costs $5.00 and is held
Chapter 10, Problem 10.9(choose chapter or problem)
Suppose that a European call option to buy a share for $100.00 costs $5.00 and is held until maturity. Under what circumstances will the holder of the option make a profit? Under what circumstances will the option be exercised? Draw a diagram illustrating how the profit from a long position in the option depends on the stock price at maturity of the option.
Questions & Answers
QUESTION:
Suppose that a European call option to buy a share for $100.00 costs $5.00 and is held until maturity. Under what circumstances will the holder of the option make a profit? Under what circumstances will the option be exercised? Draw a diagram illustrating how the profit from a long position in the option depends on the stock price at maturity of the option.
ANSWER:Step 1 of 3
A European call option allows the holder of the option to purchase the underlying asset or security at the time of expiration. If the stock price at expiry is higher than the strike price, then the owner of the option can make a profit.