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The common stock of Company XYZ is currently trading at a price of $42.

The common stock of Company XYZ is currently trading at a price of $42.00 both a put and a call option are available for XYZ stock, each having an exercise price of $40 and an expiration date in exactly six months.  The current market prices for the out and call are $1.45 and a$3.90,  respectively.
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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