Call option on this stock at the same exercise price

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Reference no: EM131568693

The price of a stock is currently $100 per share. The premium on a European put on this share at exercise price $100 ("on the money") is $5 per share.

(a) Suppose an investor purchases this stock and buys an "on the money" put option (i.e., has exercise price equal to the current price) for each share she buys. Draw the profit "profile" (profits that would result from every possible stock price outcome by the expiration date of the option). Explain.

(b) Compare this pattern with the pattern that results from buying a call option on this stock at the same exercise price. Which is better, he call option or the position in (a)? Explain.

Reference no: EM131568693

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