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# wk4 - Solutions Tutorial Week 4 While it is true that both...

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Solutions – Tutorial Week 4 Chapter 21 13 While it is true that both the buyer of a call and the seller of a put hope the price will rise, the two positions are not identical. The buyer of a call will find her profit changing from zero and increasing as the stock price rises [see text Figure 21.1(a)], while the seller of a put will find his loss decreasing and then remaining at zero as the stock price rises [see text Figure 21.2(b)]. 14. You would buy the American call for \$75, exercise the call immediately in order to purchase a share of Pintail stock for \$50, and then sell the share of Pintail stock for \$200. The net gain is: \$200 – (\$75 + \$50) = \$75. If the call is a European call, you should buy the call, deposit in the bank an amount equal to the present value of the exercise price, and sell the stock short. This produces a current cash flow equal to: \$200 – \$75 – (\$50/1 + r) At the maturity of the call, the action depends on whether the stock price is greater than or less than the exercise price. If the stock price is

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wk4 - Solutions Tutorial Week 4 While it is true that both...

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