Reference no: EM132945940
Problem - Suppose you think Apr stock is going to appreciate substantially in value in the next year. Say the stock's current price, so, is $200, and a call option expiring in one year has an exercise price, X, of $200 and is selling at a price, C, of $10. With $20,000 to invest, you are considering three alternatives.
a. Invest all $20,000 in the stock, buying 100 shares.
b. Invest all $20,000 in 2,000 options (20 contracts).
c. Buy 100 options (one contract) for $1,000, and invest the remaining $19,000 in a money market fund paying 4% in interest over 6 months (8% per year).
Required - What is your rate of return for each alternative for the following four stock prices in 6 months?
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