Question

5. You purchase a 1-year European call option on ABC stock with strike price 100. The option premium is $10. The effective annual interest rate is 5%, so that 100 dollars lent for 1 year will return 105 dollars. What is the PROFIT if ABC stock is trading at 115 on the expiration day?

Answer 1

Profit on the stock is $5

Step-by-step explanation:

The strike price of ABC stock = 100

Premium amount = $10

Effective annual interest rate = 5%

The price of the stock at the time of expiration = $115

Now we have to find the profit when the ABC is sold at $115. Below is the formula to find the profit.

Profit on the ABC stock = Price at time of expiration – strike price – premium amount

Now insert all the values in the above formula.

Profit on the ABC stock = 115 – 100 – 10

Profit on the ABC stock = $5