Suppose a Call Option Over ANZ Shares with an Exercise

question 27

Essay

Suppose a call option over ANZ shares with an exercise price of $34 can be purchased for $0.56.(i)Draw the option's intrinsic value line, indicating when the option is in-, at- and out-of-the-money.(ii)Draw the option's payoff line and indicate the 'break-even' point.

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Definitions:

Cost Method

An accounting approach where investments are recorded at their acquisition cost, without recognizing any changes in market value until they are sold.

Investment Account

An account held at a financial institution or brokerage used to hold, manage, and track securities investments and transactions.

Voting Shares

Shares that give the shareholder the right to vote on company matters, such as the election of the board of directors.

Bonds Payable

Long-term liabilities representing money owed by an entity to bondholders, to be repaid at a specified maturity date with interest.