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Unformatted text preview: large orders from abroad, she expects the price of Sooner to
increase to $70 per share. As an alternative, Carol is considering purchase of a
call option for 100 shares of Sooner at a striking price of $60. The 90-day
option will cost $600. Ignore any brokerage fees or dividends.
a. What will Carol’s profit be on the stock transaction if its price does rise to
$70 and she sells? CHAPTER 16 Hybrid and Derivative Securities 707 b. How much will Carol earn on the option transaction if the underlying stock
price rises to $70?
c. How high must the stock price rise for Carol to break even on the option
d. Compare, contrast, and discuss the relative profit and risk associated with the
stock and the option transactions.
LG6 16–21 CHAPTER 16 CASE Put option Ed Martin, the pension fund manager for Stark Corporation, is
considering purchase of a put option in anticipation of a price decline in the
stock of Carlisle, Inc. The option to sell 100 shares of Carlisle, Inc., at any time
during the next 90 days at a...
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This document was uploaded on 01/19/2014.
- Fall '13