Today, you are buying a one-year call on Piper Sons stock with a strike price of
ID: 2786653 • Letter: T
Question
Today, you are buying a one-year call on Piper Sons stock with a strike price of $27.50 per share and a one-year risk-free asset that pays 4 percent interest. The cost of the call is $1.06 per share and the amount invested in the risk-free asset is $26.44. What is the maximum potential loss per share on these investments at the end of one year?
Today, you are buying a one-year call on Piper Sons stock with a strike price of $27.50 per share and a one-year risk-free asset that pays 4 percent interest. The cost of the call is $1.06 per share and the amount invested in the risk-free asset is $26.44. What is the maximum potential loss per share on these investments at the end of one year?
Explanation / Answer
The Maximum loss you can lose on these purchases over the next year:
Maximum loss = ($26.44 × 1.04) - $26.44 + $0 - $1.06 = $ 0