# Consider the following option portfolio: You write a January 2012 expiration call option on IBM with exercise price \$168, and the priceof the call option is \$8.93. You also write a January expiration IBM put option with exercise price \$163, the price of the put option is\$10.85.Instructions: for parts a, b, and c, enter your answer as a decimal rounded to the nearest cent.a. What will be the profit/loss on this position if IBM is selling at \$162 on the option expiration date? \$b. What will be the profit/loss on this position if IBM is selling at \$174 on the option expiration date? \$c. At what two stock prices will you just break even on your investment (i.e., zero net profit)?For the put, this requires that: \$For the call this requires that: \$d. What kind of “bet" is this investor making; that is, what must this investor believe about IBM's stock price in order to justify theposition?betting that the IBM stock price will go up.betting that the IBM stock price will go down.betting that the IBM stock price will have low volatility.betting that the IBM stock price will have high volatility.

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Step 1

a-b

Calculation of Risk-Free Rate:

a. The profit or loss at current price of \$162 is \$18.78.

b. The profit or loss at current price of \$174 is \$13.78.

c. The break-even of put is \$143.22 and break-even of put is \$187.78.

d. The correct option is “Option C”.

Step 2

Excel Workings:

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