Question

A call option has an exercise price of $150.At the option expiration date, the stock price could be either $100 or $200.Which investment would combine to give the same payoff as the stock?
A) Lend PV of $100 and buy two calls.
B) Lend PV of $100 and sell two calls.
C) Borrow $100 and buy two calls.
D) Borrow $100 and sell two calls.

Answer 1

Answer:

A) Lend PV of $100 and buy two calls.

Explanation:

For the option expiration date, it is mentioned that the stock price could be either $100 or $200 so it would be the final payoff either in $100 or $200

Now the lending of the present value i.e. $100 would be compulsory

So, the two calls values would be

= ($200 - $150) × 2

= 100

Total value be

= $100 + $100

= $200

Therefore the first option is correct

And all the other options are wrong