Eric owns 100 stocks of virginia company with a cost of 35, Ask an Expert

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Eric owns 100 stocks of Virginia company with a cost of $35 a stock. The stock is currently trading at $54 a share. Eric believes the price of Virginia will fall to $45 a stock in the near future but over the longer term of 3 to 5 years, increase in value to $75 a stock. Being an intelligent investor, Eric would like to benefit from the expected near term decline if it occurs. Therefore, Eric writes a covered call at a strike price of $55 and a premium of $2 (each call contract has 100 stocks)

(a) How will the covered call help profit if the expected price decline occurs?

(b) What is the maximum loss can incur from the call?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92172263

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