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What is her percentage gain or loss

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Reference no: EM132097053

Premise:

Alice wants to invest in the stock of XYZ Inc., and is trying to decide whether she should purchase shares, call options or put options. 

She estimates that, as of October 16 (when the options expire), XYZ stock will be worth one of three possible prices: $48, $63, or $69. She estimates that each of these prices is equally likely. 

Thus, EV of the share is $60.

EV of Call option = Max ( 60 - 60 , 0 ) = 0

EV of Put option = Max ( 60 - 60 , 0 ) = 0

Question:

It turns out that on October 16, XYZ is selling for $48 a share. 

If Alice had purchased shares at $60, what is her percentage gain or loss? Also, if Alice had purchased CALL and PUT options with a $60 strike price with a premium equal to the expected value you calculated in part above, what is her percentage gain or loss? 

Reference no: EM132097053

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