Today,you Are Buying a One-Year Call on One Share of Webster

question 2

Multiple Choice

Today,you are buying a one-year call on one share of Webster United stock with a strike price of $40 per share and a one-year risk-free asset that pays 4 percent interest.The cost of the call is $1.85 per share and the amount invested in the risk-free asset is $38.46.What is the most you can lose on these purchases over the next year?

• A)-$1.85
• B)-$0.31
• C)$0
• D)$0.42
• E)$1.54

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Definitions:

Release

The act of making something available to the public, or allowing a substance, energy, etc., to emerge.

Ball

A spherical object; in mathematics, the set of all points in space at or below a certain distance from a given point.

Rectangle

A four-sided shape that has four 90-degree angles, with its opposing sides being parallel and of the same length.

Perimeter

The total length around the boundary of a two-dimensional shape.