Answer the Questions Given the Following Information

Answer the questions given the following information:
     Price of a stock                                 $52
     Strike price of a three-month call      $50
     Market price of the call                      $4
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a. Is the call "out" of the money?
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b. What is the time premium paid for the call?
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c. What is the maximum possible loss from buying the call?
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d. What is the maximum profit the buyer of the call can earn?
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e. What is the maximum profit the seller of the call can earn?
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f. What price of the stock will assure that the buyer of the call will not sustain a loss?
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g. If an investor sells the call covered, what is the cash inflow or cash outflow?
After three months (i.e., at the expiration of the options), the price of the stock is $53.
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h. What is the profit or loss from buying the call?
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i. What is the profit or loss from selling the call naked?
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j. At expiration, what is the time premium paid for the call?

Correct Answer:

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a. The call is in the money: $52-$50=$2 ...

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