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katrin [286]
3 years ago
7

Suppose you believe that Delva Corporation's stock price is going to decline from its current level of $82.50 sometime during th

e next 5 months. For $510.25 you could buy a 5-month put option giving you the right to sell 100 shares at a price of $85 per share. If you bought this option for $510.25 and Delva's stock price actually dropped to $60, what would your pre-tax net profit be?
Answer
A. -$510.25
B. $1,989.75
C. $2,089.24
D. $2,193.70
E. $2,303.38
Business
1 answer:
Yakvenalex [24]3 years ago
6 0

Answer:

B. $1,989.75

Explanation:

Cost of option (C) = $510.25

Option selling price (Po) = $85 per share

Share price when selling (Ps) = $60 per share

Number of shares (n) = 100 shares

Since the option allows you to sell shares that are valued at $60 for at $85 each, by selling 100 shares, your total earnings are:

E=(P_o-P_s)*n\\E=(\$85-\$60*)100\\E=\$2,500

To find the pre-tax net profit (P), subtract the amount paid for the options from your earnings:

P=E-C= \$2,500-\$510.25\\P=\$1,989.75

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<em>The marginal cost of a given level of output is the slope of the line that is tangent to the total cost curve at that level of output</em>

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Average annual percentage return

                              Cost    Market   20Y1   20Y2  20Y3  20Y4  20Y5  20Y6

                                 per share

Preferred stock   $20.00 $25.00    2%        2%       2%      2%      2%      2%

Common stock    $15.00  $17.50    0%         0%       0%   0.7%   0.8%   0.11%

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                                         Preferred Stock               Dividends

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20Y1,     $80,000           $80,000   $0.40                 $0           $0

20Y2,    $90,000             90,000   $0.40                   0           $0

20Y3,   $150,000           150,000   $0.40                   0           $0

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20Y5,   $160,000           100,000   $0.40             60,000       $0.12

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                                 per share

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Common stock    $15.00  $17.50    0%         0%       0%   0.7%   0.8%   0.11%

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