You are given the following information concerning a stock and a call option and a put option ? Price of the stock $42 Strike price (both options) $40 Price of the call $6 Price of the put $3 Expiration date three months ? a. What is the call's intrinsic value? b. What is the time premium paid for the call? c. What is the put's intrinsic value? d. What is the time premium paid for the put? e. If the price of the stock declines to $25, what is the maximum amount you could lose by buying the call? f. If the price of the stock declines to $25, what is the maximum amount you profit by buying the put? g. If after three months the
price of the stock is $48, what is the profit (loss) from buying the call? h. If after three months the price of the stock is $48, what is the profit (loss) from selling the put?
What will be an ideal response?
a. Intrinsic value: $42 - 40 = $2?b. Time premium: $6 - 2 = $4?c. Intrinsic value: $40 -42 = nil; ($0)?d. Time premium: $3 - 0 = $3?e. Maximum loss from buying the call: $6?f. Intrinsic value of the put: $40 - 25 = $15 Profit from buy the put: $15 - 3 = $12?g. Profit from buy the call: $8 - 6 = $2?h. Maximum profit from selling the put: $3
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