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26 November, 13:47

An investor buys an option on a stock that will return $150 profit if the stock goes up and lose $650 if it goes down. The investor estimates there is a 65% chance the stock will go up.

(a) What is the expected profit for this option? (Enter your answer to two decimal places.)

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  1. 26 November, 13:54
    0
    The answer is expected loss of $130 (-$130)

    Explanation:

    The percentage that stock will go up is 65%.

    Therefore, the percentage that the stock will go down is 100% - 65% = 35%

    Value that it will go up is $150 x 65% = $97.5

    Value that it will go down is $650 x 35% = $227.5

    Expected profit or loss:

    $97.5 - $227.5

    = - $130

    It is an expected loss of $130.
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