A call option has an exercise price of $100. At the final exercise date, the stock price could be either $50 or $150. Which investment would combine to give 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

By lending the present value of $50 and buying two call options, you replicate the payoff of owning the stock. If the stock price is $150, the calls are exercised, and you receive $100 per call, totaling $200. After repaying the loan, you have $150, matching the stock's payoff. If the stock price is $50, the calls expire worthless, and you have $50 from the loan repayment, matching the stock's payoff.

A Call Option Has an Exercise Price of $100