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Consider an index option. The index is at 425.48, and a two-month call with an exercise price of 425 is priced at $15. You are in the 31 percent tax bracket. Compute the after-tax profit for the following cases. Assume 100 calls.
a. You buy the call. One month later, the index is at 428 and the call is at $12. You sell the call.
b. You buy the call and hold it until expiration, whereupon the index is at 441.35. You exercise the call.
c. You hold the call until expiration, when the index is at 417.15.
d. How will your answers in a and b be affected if the option positions are not closed out by the end of the year?
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