Answer the Questions Given the Following Information

question 64

Essay

Answer the questions given the following information:
     Price of a stock                                 $52
     Strike price of a three-month call      $50
     Market price of the call                      $4
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a. Is the call "out" of the money?
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b. What is the time premium paid for the call?
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c. What is the maximum possible loss from buying the call?
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d. What is the maximum profit the buyer of the call can earn?
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e. What is the maximum profit the seller of the call can earn?
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f. What price of the stock will assure that the buyer of the call will not sustain a loss?
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g. If an investor sells the call covered, what is the cash inflow or cash outflow?
After three months (i.e., at the expiration of the options), the price of the stock is $53.
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h. What is the profit or loss from buying the call?
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i. What is the profit or loss from selling the call naked?
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j. At expiration, what is the time premium paid for the call?

Understand the valuation models for stocks with nonconstant and constant growth.

Know the rights of shareholders, including preemptive rights and implications of dual-class shares.

Identify factors that cause a difference between a stock’s market value and its intrinsic value.

Grasp the role of the marginal investor in determining stock prices.

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Definitions:

Constant

A fixed value that does not change in a particular context or mathematical equation.

M-Squared Measure

A performance metric that measures the return of a portfolio, adjusted for risk, compared to a benchmark.

Risk-Adjusted Return

A measure of an investment's return that accounts for the level of risk taken, allowing for the comparison of investments with different risk levels.

Mutual Funds

Shareholder-funded investment initiatives that engage in diversified portfolios and are managed by experts.