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Calculate the profit-loss on the option contract

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Question - Mary is considering investing in a listed company BHP. Mary believes that BHP's share price will rise over the next 2 months. However, Mary does not currently have the required cash flow to purchase the shares now, so they decide to take out an option contract instead. The relevant option contract has an exercise price of $41 and a premium of $1.60.

1. Should Mary buy or sell a call or a put option if they believe the share price will increase before they can purchase the shares?

2. Calculate the breakeven point for the option contract.

3. Calculate the profit/loss on the option contract when the share price is $43.40 as well as $39. In what situations would Mary exercise their option contract?

Reference no: EM133095909

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