Question

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?

Answer 1

Only if the stock price is greater than
`\$126.00`

Step-by-step 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
`\$126.00`.

-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.