You have purchased one call option expiring in one year with a strike price of $40. The current price of the underlying is $30, the interest rate is zero, and the premium for the call option is $2.63. 1) Draw the payoff and P&L diagrams for the call option at expiration.
2) What is the P&L on the option at expiration if the underlying is $57.50 (i. e. S1 = 57.5)?

Solution :

2). Calculation of the P & L on the option at expiration if underlying price is $ 57. 50

As the underlying price is more than the exercise price, the option is exercised.

The initial cash flow = - $ 2.63

Cash flow at the expiration = $ 57.50 - $ 40

                                             = $ 17.50

Therefore, profit = $ 17.50 - $ 2.63

                           = $ 15.07

1). The strike price or the exercise price = $ 40

    Premium for call option = $ 2.63

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