Today, you are buying a one-year call on one share of XYZ stock with a strike price of $35 along with a one-year risk-free asset which pays 5 percent interest. The cost of the call is $1.60 and the amount invested in the risk-free asset is $33.33. How much profit will you earn if the stock has a market price of $37 one year from now?
A) $2.07
B) $2.11
C) $2.16
D) $2.29
E) $2.31

Question

Quizplus · Accepted Answer

The profit is the difference between the selling price of the stock and the cost of the call plus the interest earned on the risk-free asset. The selling price of the stock is $37, the cost of the call is $1.60, and the interest earned on the risk-free asset is $1.67 ($33.33 * 0.05). Therefore, the profit is $37 - $1.60 - $1.67 = $2.07.

Today, You Are Buying a One-Year Call on One Share