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

To calculate the profit, we need to determine the payoff for the call option at the expiration date:

Payoff = Max(Stock Price - Strike Price, 0)
Payoff = Max(44 - 40, 0)
Payoff = $4

However, we also need to subtract the initial cost of buying the call option:

Profit = Payoff - Call Cost - Amount Invested in Risk-free Asset
Profit = $4 - $2.40 - $37.74
Profit = $3.86

Therefore, the answer is D) $3.86.

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