You buy an “at the money” April call option on M&M Corp. common stock, which has a strike price of $25 and a premium of $4. At what minimum price of M&M Corp. stock will you make a profit? At what minimum price should you exercise the option and buy the stock?

You buy an “at the money” April call option on M&M Corp. common stock, which has a strike price of $25 and a premium of $4. At what minimum price of M&M Corp. stock will you make a profit? At what minimum price should you exercise the option and buy the stock?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter20: Financing With Derivatives

Section: Chapter Questions

Problem 1P

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Question

Stock Price to Profit
You buy an “at the money” April call option on M&M Corp. common stock, which has a strike
price of $25 and a premium of $4.

At what minimum price of M&M Corp. stock will you make a profit?
At what minimum price should you exercise the option and buy the stock?

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