Today, you are buying a one-year call on JKL stock with a strike price of $40 along with a one-year risk-free asset which pays 6 percent interest. The cost of the call is $2.40 and the amount invested in the risk-free asset is $37.74. How much profit will you earn if the stock has a market price of $44 one year from now?
A) -$0.14
B) $1.60
C) $3.20
D) $3.86
E) $4.00

Question

Quizplus · Accepted Answer

The profit from the call option is calculated as the difference between the market price and the strike price, minus the cost of the call. Here, it's $(44 - $40) - $2.40 = $1.60. The risk-free asset grows to $37.74 * 1.06 = $40.00. The total profit is the sum of both, $1.60 (from the call) + $40.00 (from the risk-free asset) - the initial investment ($37.74 + $2.40 = $40.14), which equals $1.60 + $40.00 - $40.14 = $1.46. However, the correct calculation should consider the profit from the call and the final value of the risk-free asset separately, leading to a reevaluation of the provided options and calculations.

Today, You Are Buying a One-Year Call on JKL Stock