Final answer:
In part (a) of the question, the pay-off and profit/loss when Macrosoft stock is selling for $140 per share on the expiration date are calculated. If the terminal stock price is $108, the pay-off and profit/loss are also calculated.
Step-by-step explanation:
In part (a) of the question, we are asked to calculate the pay-off and profit/loss when Macrosoft stock is selling for $140 per share on the expiration date.
The pay-off can be calculated by subtracting the initial purchase price from the terminal stock price.
So, the pay-off would be $140 - $150 = -$10 per share.
The profit/loss can be calculated by subtracting the initial purchase price and any transaction costs from the terminal stock price.
Assuming a transaction cost of $5 per share, the profit/loss would be $140 - $150 - $5 = -$15 per share.
If the terminal stock price is $108, the pay-off would be $108 - $150 = -$42 per share and the profit/loss would be $108 - $150 - $5 = -$47 per share.
The profit or loss from selling Macrosoft stock at $140 or $108 per share depends on the price at which the stocks were initially purchased and the type of financial instrument or trading position. Without specific details on the initial transaction, we cannot determine the exact figures. In options trading, it also depends on the strike price and the premium paid for the option.
In part (a), if Macrosoft stock is selling for $140 per share on the expiration date, the payoff depends on the type of financial instrument or the position held (such as options contracts). For instance, if an investor bought a call option with a strike price below $140, their payoff would be the difference between the stock price ($140) and the strike price, multiplied by the number of shares covered by the option, minus any premium paid for the option. If the terminal stock price is $108, the profit or loss would again depend on the specific investment; for example, a put option with a strike price above $108 would be profitable. Without more context, such as the type of position (e.g., long, short, call, put), the number of shares involved, and the initial cost of the position, we cannot calculate the exact profit or loss.
The above explanation holds for options and other derivative instruments, but if the investor simply owns the stock, the profit or loss is the difference between the selling price and the purchase price, plus any associated fees, such as transaction costs. If the stocks were initially purchased at a price below the selling price, a profit is made; conversely, if stocks were bought at a higher price than the selling price, a loss is incurred. For instance, if the stocks were bought at $100, the profit at a selling price of $140 per share would be $40 per share (ignoring transaction costs), whereas a selling price of $108 would result in a loss of $8 per share.