Consider a stock priced at $30 with a standard deviation of 0.3. The risk-free rate is 0.05. There are put and call options available at exercise prices of 30 and a time to expiration of six months. The calls are priced at $2.89 and the puts cost $2.15. There are no dividends on the stock and the options are European. Assume that all transactions consist of 100 shares or one contract (100 options). Use this information to answer questions 1 through 10.
-Suppose the investor constructed a covered call.At expiration the stock price is $27.What is the investor's profit?
A)$589
B)$289
C)$2,989
D)$2,711
E)none of the above

Question

Quizplus · Accepted Answer

A covered call involves buying the stock and selling a call option. The initial cost is the stock price minus the call premium received. Here, the initial cost is $30 * 100 - $2.89 * 100 = $3000 - $289 = $2711. At expiration, the stock price is $27, so the value of the stock is $27 * 100 = $2700. The call option expires worthless (since the stock price is below the exercise price), so the investor keeps the premium. The profit is the final value minus the initial cost: $2700 - $2711 = -$11. Since none of the provided options match this calculation, the correct answer is E) none of the above.

Consider a Stock Priced at $30 with a Standard Deviation