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Compute the payoff schedule for the call option

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Reference no: EM13200146

A call option has a value of C = $5 and a put has a value of P = $3.  Both options have an exercise price of X = $20. The options are to expire today.

a. Compute the payoff schedule for the call option using the following stock prices, S, and draw a graph of the payoff schedule.

S

10

15

20

25

30

Intrinsic Value

 

 

 

 

 

Payoff

 

 

 

 

 

b. Compute the payoff schedule for the call option using the following stock prices, S, and draw a graph of the payoff schedule.

S

10

15

20

25

30

Intrinsic Value

 

 

 

 

 

Payoff

 

 

 

 

 

c. Suppose that you buy the share for $20, but you would like to hedge your downside risk. Choose either the call or put option to eliminate some of the potential loss, and complete the table below.  State what the resulting payoff schedule looks like.

S

10

15

20

25

30

Gain/loss on share

 

 

 

 

 

Intrinsic Value (Call or Put)

 

 

 

 

 

Payoff

 

 

 

 

 

Reference no: EM13200146

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