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:

Individual Demand Curve

A graphical representation showing the quantity of a goods or services a single consumer is willing and able to purchase at various prices.

Budget Constraints

The limitations on the spending behavior of consumers, based on their income and the prices of goods and services.

Indifference Curves

Representations on a graph showing combinations of goods or services between which a consumer is indifferent, meaning they have no preference for one combination over another.

Elasticity

Elasticity refers to the degree to which demand or supply reacts to changes in price or other factors.