The payoff to the holder of a call option is given by:
A)C = max(S - K,0)
B)C = min(K,0)
C)C = max(K - S,0)
D)C = min(K - S,0)
E)C = min(S - K,0)

Question

Quizplus · Accepted Answer

The payoff to the holder of a call option is the difference between the underlying asset's price at expiration (S) and the strike price (K). If S is greater than K, then the holder profits from the swap, and the difference is max(S - K, 0). If S is less than or equal to K, then the holder does not exercise the option, and the payoff is zero. Thus, the best choice is A, which represents the typical call option's payoff formula.

The Payoff to the Holder of a Call Option Is