error in payoff diagram - CID A2003, 4(i)(a)??

Question says: Draw approximate Profit / Loss diagram for (a) Buy 1 european at-the-money call option.

The examiner draws:



But this doesn't look right compared to Wilmott page 27, or indeed my Excel spreadsheet:



So what's gone wrong here? I thought that the time value is always positive for calls, since the payoff is potentially unlimited.

[edit] please forgive my mislabelled y axis, which should say profit

 

oh dear, similar story for part (b).

examiner's graph:



My graph using excel:



what does the ASSET from Acted say?

[N.B. you need to use high volatility to achieve positive net premium as the examiner seems to have assumed]

 

part a definetely looks wrong...should be as you drew gareth...bold line (for current expiry)at the bottom and curvy ones above it (2m/3m expiry).

as for part b...i don't see any probs with the curve...drawn now..it will be straight lines and 2m/3m it will be curvy and close to the bold line(now).

 

the curve at 2 months shouldn't stay strictly under the straight lines as the examiner has drawn it - it should cross the straight lines.

What really worries me is how wrong the examiner is on this question. The call graph is indefensible, any student with half a clue about CID would get this right, so why on earth has the examiner got it so wrong??

Make me think the examiner didn't really understand CID properly...

 

-examiner made a wrong CALL!!lol

 

so the conclusion is that we're damned if we get it right, damned if we get it wrong!

Now what about the other question from this paper in my other post?

 

havent got the wilmott, so your graph must be right if thats wat wilmott says
graph makes intuitive sense that a deep in the money put must have delta close to -1 near expiry (behave like -1* share, i.e opposite to a share)

or something like
delta of call is N(d1) where d1 is as usual and N is cumulative normal

P=C-S+PV(K) for k exericse price
Delta put = delta (call) - 1 = N(D1) - 1
now as t tends to T (i.e at expiry and no time left to maturity) N(D1) tends to -infinity when S<K and +infinty when S>K
deep in the money put is S<K
so delta ( deep in money put ) is = N(minus infinity) -1 = 0 -1 = -1

bottom graphs on reaffirms your assertion..

http://www.quantnotes.com/fundamentals/options/thegreeks-delta.htm


examiners words seem complete opposite-increase/ decrease put in "wrong " places according to all these anaylses...i

ps ..examiner talks about turning point in graph..doesnt this graph have point of inflexion, if you can even call it that?