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A speculator buys a call option for $3, with an exercise price of $50. The stock is currently priced at $49, and rises to $55 on the expiration date. What is the stock price at which the speculator would break even?Select one:a. $52b. $49c. $53d. $50e. $58

Question

A speculator buys a call option for 3,withanexercisepriceof3, with an exercise price of 50. The stock is currently priced at 49,andrisesto49, and rises to 55 on the expiration date. What is the stock price at which the speculator would break even?Select one:a. 52b.52b. 49c. 53d.53d. 50e. $58

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Solution

The speculator would break even when the stock price is 53.Thisisbecausethespeculatorboughtthecalloptionfor53. This is because the speculator bought the call option for 3 and the exercise price is 50.Therefore,thetotalcostforthespeculatoris50. Therefore, the total cost for the speculator is 53 (50+50 + 3). The speculator would start making profit when the stock price exceeds 53.So,thecorrectanswerisc.53. So, the correct answer is c. 53.

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