Consider a Portfolio Consisting of a Long Call with an Exercise

question 3

Multiple Choice

Consider a portfolio consisting of a long call with an exercise price of X,a short position in a non-dividend paying stock at an initial price of S₀,and the purchase of riskless bonds with a face value of X and maturing when the call expires.What should such a portfolio be worth?

• A)C + P - X(1 + r)^-T
• B)C - S₀
• C)P - X
• D)P + S₀ - X(1 + r)^-T
• E)none of the above

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Definitions:

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Earnings

The amount of profit that a company produces during a specific period, indicating the financial performance and profitability.

Executive Change

The process or event of a change in the leadership or management team within an organization, which can have significant impacts on the strategic direction and performance of the company.

Bad Debt Expense

An expense account reflecting the estimated amount of receivables that are not expected to be collected due to customer defaults.