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Suppose that a European call option to buy a share for $120.00 costs $6.00 and is held until maturity. Under what circumstances will the holder of the option make a profit?

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opudodennis

Answer:

Only if the stock price is greater than [tex]\$126.00[/tex]

Explanation:

-Ignoring time value of money, the stock's holder will only make a profit if the stock price at time of maturity is greater than [tex]\$126.00[/tex].

-Price must be greater than total cost ($120+$6) of buying the option.

-The option will not be exercised if the stock price is between $120 and $126. If exercised at these prices, the holder will make a loss.