The risk-free holding period return for the next six month is 4 percent, which corresponds to an 8 percent annual rate.
a) For each possible stock price in the following sequence, calculate the expiration date payoffs (net of the intial purchase price) for the following positions:(1) buy one XYZ call option, and (2) short one XYZ call option: 20,25,30,35,40,45,50,55,60
b) Using the same potential stock prices as in Part a, calculate the expiration date payoffs (net of the initial purchase price) for the following positions: (1) buy one XYZ put option, and (2) short one XYZ put option. Draw a graph of these payoff relationships, labeling the prices at which these investments will break even.
This question was asked on Apr 25, 2010.
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