A call option has an exercise price of $100. At the exercise date, the stock price could be either $50 or $150. Which investment strategy provides the same payoff as the stock?
A)Lend PV of $50 and buy two calls.
B)Lend PV of $50 and sell two calls.
C)Borrow $50 and buy two calls.
D)Borrow $50 and sell two calls.

Question

Quizplus · Accepted Answer

Buying two call options with an exercise price of $100 will provide a payoff of $0 if the stock price is $50 and $100 if the stock price is $150. Lending the present value of $50 ensures that you have $50 at the exercise date, matching the stock payoff of $50 or $150.

A Call Option Has an Exercise Price of $100