A call option has an exercise price of $150. At the final exercise date, the stock price could be either $100 or $200. Which investment would combine to give the same payoff as the stock?
A) Lend PV of $100 and buy two calls
B) Lend PV of $100 and sell two calls
C) Borrow $100 and buy two calls
D) Borrow $100 and sell two calls

Question

Quizplus · Accepted Answer

By lending the present value of $100 and buying two call options, you replicate the payoff of owning the stock. If the stock price is $200, the calls will be exercised, and you will receive $100 per call, totaling $200. If the stock price is $100, the calls will not be exercised, and you will have the $100 from lending.

A Call Option Has an Exercise Price of $150