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Below is a list of call option premiums with different strike prices. The options mature 1 year later.

Strike price Premium 48 49 50 51 52 8.13 7.61 7.12 6.65 6.20

The current stock price is 50. The risk-free interest rate is 5% p.a., continuously compounded.

(i) Find out the cost of the following payoff diagram:

ST 50 52

(ii) What is the price such that the above strategy is break-even?

(iii) Find out the cost of the following payoff diagram:

Payoff ST 48 50

(iv) Find out the cost of the following payoff diagram:

Payoff ST 49 51

(v) Find out the cost of the following payoff diagram:

Payoff ST 49 50 51

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Answer #1

4 Buy call at 50 Sold call at 52 7.12 0.92 Break even price 50.92 10 -8.13 7.12 1.01 Sold call at 48 Buy call at 50 12 13 Sell call at 49 Buy call at 49 Sell call at 51 (iv) 16 I 17 18 19 7.12 6.65 7.14

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