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You have purchased 10 call option contracts on CBA stock with an exercise price of $58.50. Theseoptions were quoted at $2.50 when purchased. Each contract gives you the right to purchase 100 shares ofCBA. The option expires today when CBA stock is trading at $62.60. What is the net profit or loss on thisinvestment ignoring trading costs and taxes?

Question

You have purchased 10 call option contracts on CBA stock with an exercise price of 58.50.Theseoptionswerequotedat58.50. Theseoptions were quoted at 2.50 when purchased. Each contract gives you the right to purchase 100 shares ofCBA. The option expires today when CBA stock is trading at $62.60. What is the net profit or loss on thisinvestment ignoring trading costs and taxes?

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Solution

To calculate the net profit or loss on this investment, follow these steps:

  1. Calculate the total cost of the options: The cost of one option contract is the quoted price times the number of shares per contract. In this case, it's 2.50100=2.50 * 100 = 250. Since you bought 10 contracts, the total cost is 25010=250 * 10 = 2500.

  2. Calculate the total value of the options at expiration: The value of one option contract at expiration is the difference between the stock price and the exercise price, times the number of shares per contract, but only if the stock price is higher than the exercise price (otherwise, the value is zero because you wouldn't exercise the option). In this case, it's (62.6062.60 - 58.50) * 100 = 410.Sinceyouhave10contracts,thetotalvalueis410. Since you have 10 contracts, the total value is 410 * 10 = $4100.

  3. Subtract the cost from the value to find the net profit or loss: In this case, it's 41004100 - 2500 = $1600.

So, the net profit on this investment is $1600.

This problem has been solved

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