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Garthurst in his capacity as an analyst at Third Global Investments has been looking at a listed company called Wireless Ltd. Garthurst believes Wireless Ltd's share price will rise over next 2 months. The issue is that Global Investments does not have the cash flow required to buy the share now. The current share price of Wireless Ltd is $35.00. There are call options listed on the exchange with an expiry of 2 months, an exercise price of $40.00 and a premium of $2.25.
(a) In order for Third Global Investments to benefit from Garthurst's assessment of Wireless Ltd, should a long or a short position be taken in the call option? What will be the initial cash flow from this position?
(b) Calculate the breakeven point, and the profit/loss when the market price is $45 as well as $35.
(c) Is there a way Third Global Investments could have profited from an expected price increase using put options?
Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..
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