Answer-first summary for fast verification
Answer: $\$32.00$
**C. TRUE:** $32.00$ Where St is the breakeven stock price, S0 is the current price, K is the strike price, Qs is the quantity of shares, and Qc is the quantity of options, breakeven is defined by the following equality: $(S_T - S_0)Q_s = (S_T - K)Q_c - Q_c c$ $(S_T - K)Q_c - (S_T - S_0)Q_s = Q_c c$ $S_T Q_c - KQ_c - S_T Q_s + S_0 Q_s = Q_c c$ $S_T (Q_c - Q_s) = Q_c c + KQ_c - S_0 Q_s$ $S_T = (Q_c c + KQ_c - S_0 Q_s)/(Q_c - Q_s)$; in this case: $S_T = (4,000\times\$2.50 + \$28.00\times 4,000 - \$20.00\times 500)/(4,000 - 500) = \$32.00$
Author: Manit Arora
Ultimate access to all questions.
Q-21.9.3. A new trader has \`10,000.00$ to invest in a stock or options on the stock. The current price of the stock is $\. She is interested in out-of-the-money European call options that mature in one year. The strike price is \`28.00$, and the call premium is $\; i.e., S(0) = \`20.00$, $K = \, and c = \`2.50$. Therefore, she can either purchase 500 shares or $\10`,000 \div \`2.50` = 4,000$ options. If we ignore the impact of discounting, what is the breakeven stock price for the two strategies? (Note: this is inspired by GARP’s EOC Question 4.20).
A
\`18.43`$
B
\`25.50`$
C
\`32.00`$
D
\`47.72`$
No comments yet.