What is the breakeven point that an investor can obtain from a 6-month strategy employing a long 830 call and a short 850 call? Interest rates are 0.5% per month.

Question

Quizplus · Accepted Answer

To calculate the breakeven point, we need to find the point where the profit is zero. This occurs when the price of the underlying asset equals the sum of the strike price and the option premium paid.

The option premium paid for the long 830 call is the maximum loss, which is $20. The option premium received for the short 850 call is the maximum gain, which is $10. So the net cost of this strategy is $10.

The breakeven point is therefore $850 (the strike price of the short call) + $10 (the net cost of the strategy) = $860.

However, we need to take into account the interest rate of 0.5% per month for 6 months. Using the formula:

Breakeven point = Strike price of short call + Net cost of strategy / (1 + interest rate)^time

Breakeven point = $850 + $10 / (1 + 0.005)^6 = $842.32

Therefore, the answer is B) $842.32.

What Is the Breakeven Point That an Investor Can Obtain