Call option payoffs
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Consider a European call option on Stock A that expires on December 21 and has a strike price of $50.
a. If Stock A is trading at $55 on Dec. 21, what is the payoff to the owner of the option?
b. If Stock A is trading at $55 on Dec. 21, what is the payoff to the seller of the option?
c. If Stock A is trading at $45 on Dec. 21, what is the payoff to the owner of the option?
d. If Stock A is trading at $45 on Dc. 21, what is the payoff to the seller of the option?
e. Draw the payoff diagram to the owner of this option with respect to the stock price at expiration.
f. Draw the payoff diagram to the seller of this option with respect to the stock price at expiration.
g. If the seller of a call option never receives cash at expiration, why would anyone ever sell a call option?
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Solution Summary
The solution calculates payoffs to the owner and seller of call options at expiration. Also, payoff diagrams at expiration are drawn.
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