Question

You have purchased one call option expiring in one year with a strike price of $40. The current price of the underlying is $30, the interest rate is zero, and the premium for the call option is $2.63.

(1) Draw the payoff and P&L diagrams for the call option at expiration.
(2) What is the P&L on the option at expiration if the underlying is $57.50 (i.e. S, = 57.5)?

Answer 1

Answer:

Explanation:

2)

Calculation of P&L

Underlying Price = $ 57.70

Underlying Price is more than exercise price (40) ⇒ the option is exercised.

Initial Cash Flow = - $ 2.63

Cash Flow at Expiration = $ 57.70 - $ 40 = $ 17.70

Prrofit = $ 17.7 - $ 2.63 = $ 15.07