Question

You are long 2 contracts of 1-yr call on MSFT with strike (K) of $220, and also long 2 contracts of 1-yr call on MSFT with strike (K) of $120. What will be your payoff if MSFT price at expiry (S_T) is $250

Answer 1

The correct answer is $320.

Step-by-step explanation:

According to the scenario, computation of the given data are as follows:

MSFT price at expiry (S_T) = $250

MSFT with strike (K) Contract 1 = $220

MSFT with strike (K) Contract 2 = $120

So, we can calculate the payoff by using following formula:

Payoff = [(Stock price at expiry (ST) - Strike price of $220)] + [(Stock price at expiry (ST) - Strike price of $120)]

BY putting the value, we get

Payoff = ($250 - $220) + ($250 - $120)

= $30 + $130

= $160

As there are 2 contracts, then

Total payoff = $160 × 2

= $320