The Profit or Loss on a Long Call at Expiry

question 135

Multiple Choice

The profit or loss on a long call at expiry is equal to:

• A)(maximum of (X - S)or zero)+ option premium
• B)(maximum of (X - S)or zero)- option premium
• C)(maximum of (S - X)or zero)- option premium
• D)(maximum of (S - X)or zero)+ option premium.
• E)Cannot be negative.

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Definitions:

Market Risk Premium

This is the extra return expected by investors for holding a risky market portfolio instead of risk-free assets.

Security Market Line

A line that represents the risk versus expected return of the market; used to assess the performance of investments compared to the market.

Systematic Risk

The inherent risk associated with the overall market or economy that cannot be eliminated through diversification.

Expected Return

The anticipated return on an investment, calculated as the weighted average of all possible returns with the probabilities of their occurrence.