An investor purchased a call option with an exercise price of $31 for a call premium of $4. The option was exercised a few days later when the stock price was $34. What was the return to the investor?Select one:a. $1b. -$1c. -$4d. $4
Question
An investor purchased a call option with an exercise price of 4. The option was exercised a few days later when the stock price was 1b. -4d. $4
Solution
The return to the investor can be calculated as follows:
Step 1: Calculate the profit from exercising the option. This is done by subtracting the exercise price from the stock price at the time of exercise. In this case, it would be 31 (exercise price) = $3.
Step 2: Subtract the cost of the call premium from the profit. The call premium is the price the investor paid for the option. In this case, it would be 4 (call premium) = -$1.
So, the return to the investor is -1.
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