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Question - An investor believes that the Cisco stock price is going to increase in the following 12 months from the current stock price of $200. Call options on Cisco stock expiring in 12 months have a strike price of $222 and sell at a premium of $20 each. The investor has $18,000 to invest, and is considering 3 alternatives:
Purchase 900 call options.
Purchase 90 shares.
Invest $16,200 in a money market fund returning 8% per year and buy 90 call options with the remaining money.
Assume that the stock price will be $233 per share after 12 months.
Required -
1. What will be the investor's rate of return for alternative 1?
2. What will be the investor's rate of return for alternative 2?
3. What will be the investor's rate of return for alternative 3?
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