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The stock of Scholars Inc. currently trades at $26 per share. The following European options...

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Finance

The stock of Scholars Inc. currently trades at $26 per share. The following European options on Scholars stock are available:

Options

Strike Price

Premium

Maturity

Call

$28

$2

1 year

Put

$24

$4

1 year
  1. Draw the profit diagram for a short position in the call option described above. Please label the diagram well. Show all the critical points on the diagram. For example, the intercepts on axes, maximum profit or maximum loss.
  2. Suppose an investor suggests the following strategy: sell one call option and buy one put option on Scholars stock. Draw the profit diagram for this strategy, and label the diagram well.
  3. Given the strategy in part b), what price movements are required for the investor to have a positive profit?

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