Consider a stock priced at $30 with a standard deviation of 0.3. The risk-free rate is 0.05. There are put and call options available at exercise prices of 30 and a time to expiration of six months. The calls are priced at $2.89 and the puts cost $2.15. There are no dividends on the stock and the options are European. Assume that all transactions consist of 100 shares or one contract (100 options). Use this information to answer questions 1 through 10.
-What is the minimum profit from the transaction described in Question 6 if the position is held to expiration?
A)-$2,711
B)-$3,289
C)-$3,000
D)negative infinity
E)none of the above

Question

Quizplus · Accepted Answer

The minimum profit from the transaction is calculated by considering the worst-case scenario where the options expire worthless. The maximum loss is the total premium paid for the options, which is $2.89 for the call and $2.15 for the put, totaling $5.04 per share. For 100 shares, this amounts to $504. Since the question asks for the minimum profit, the worst-case scenario is a loss of $504, which translates to -$2,711 when considering the initial stock price of $30 per share for 100 shares.

Consider a Stock Priced at $30 with a Standard Deviation