A call option has an exercise price of $150. At the option expiration date, the stock price could be either $100 or $200. Which investment would combine to give the same payoff as the stock?
A)Lend PV of $100 and buy two calls.
B)Lend PV of $100 and sell two calls.
C)Borrow $100 and buy two calls.
D)Borrow $100 and sell two calls.

Question

Quizplus · Accepted Answer

By lending the present value of $100 and buying two call options, you can replicate the payoff of owning the stock. If the stock price is $200, the calls will be exercised, and you will have a payoff equivalent to owning the stock. If the stock price is $100, the calls will not be exercised, and you will have the $100 lent.

A Call Option Has an Exercise Price of $150