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Question - Gerry believes that Pump Ltd is expected to rise in the next few months due to unprecedented demand as a result of recent floods. Gerry does not currently have the cash flow required to buy the share but finds a European call option with an expiry of 2 months, an exercise price of $40 per share and a premium of $2.25 per share. The current share price of Pump Ltd is $35.00.
(a) Should Gerry buy or sell a put or call option in order to benefit from the expected rise in the share price of Pump Ltd.
(b) Explain when Gerry would exercise the option.
(c) Calculate the breakeven point of the option entered into by Gerry, and the profit/loss if at expiry the Pump Ltd share price is $37 and $45 respectively.
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