Explanation:

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) = \ $32.00`$

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 $\` $20.00`$ . 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 $\` $2.50`$ ; i.e., $S(0) = \`$ 20.00`$, $K = \` $28.00`$ , 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).

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MManit

Last updated: April 18, 2026 at 11:32

$\`$ 18.43`$

50.0%

$\`$ 25.50`$

50.0%

$\`$ 32.00`$

$\`$ 47.72`$

Financial Risk Manager Part 1

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