In the following example, for 3rd question and 4th question why do we have to add (Stock price in three months - Current stock price) to put option profit?
Thank you in advance.
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Sign up to join this communityA hedged stock position means that you own the stock and an option to reduce the risk. For owning the stock, you pay $S_0$ but receive $S_T$ in 3 months. Similarly, your option costs $1.50$ but will give you $\max\{X-S_T,0\}$.