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3 question (10%). a Draw a profit or loss graph for purchase of call contract with an exvercise price of SS,for which a so h Identify break-even point, maximum profit, and maximum losses premium is paid

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Answer #1

(a) & (b)The payoff graph (diagram) for a long call option with strike $ 55 and premium of $ 6 will be as shown below:

Profit / Loss Strike Price Breakeven Profif (unlimited) Loss (limited) = Premium Decreasing in an amount of loss Price less than Strike Increasing Increasing price price

where Breakeven point is the point at which the payoff curve crosses the x-axis. The Breakeven Point = Strike Price + Premium = 55 + 6 = $ 61

Maximum Loss = Premium = $ 6 and Maximum Profit = Unlimited (as the graph is open and upward sloping)

NOTE: Y-axis is the payoff from the long call position and X-axis is the price of the underlying asset (stock in this case)

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