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 calculated as follows: The call option allows you to buy the stock at $35, and the market price is $37, so the intrinsic value of the call is $2 ($37 - $35). The total cost of the investment is $1.60 for the call and $33.33 for the risk-free asset. The risk-free asset grows to $33.33 * 1.05 = $35.00. Therefore, the total value of the investment is $2 (from the call) + $35 (from the risk-free asset) = $37. The profit is $37 - ($1.60 + $33.33) = $2.07.

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