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Problem: Carol Krebs is considering buying 100 shares of Sooner? Products, Inc., at ?$45 per share. Because she has read that the firm will probably soon receive certain large orders from? abroad, she expects the price of Sooner to increase to ?$48 per share. As an? alternative, Carol is considering the purchase of a call option for 100 shares of Sooner at a strike price of ?$39. The? 90-day option will cost ?$900. Ignore any brokerage fees or dividends.
Required:
Question 1: What will? Carol's profit be on the stock transaction if its price does rise to ?$48 and she? sells? (Carol's profit be on the stock transaction if its price does rise to ?$48 and she sells is $?) (Round to the nearest dollar. Enter a negative number for a? loss)
Question 2: How much will Carol earn on the option transaction if the underlying stock price rises to ?$48??
Question 3: How high must the stock price rise for Carol to break even on the option? transaction?
Question 4: ?Compare, contrast, and discuss the relative profit and risk associated with the stock and option transactions.
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