Suppose you have $28,000 to invest. You are considering Miller-Moore Equine Enterprises (MMEE), which is currently selling
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Suppose you have $28,000 to invest. You are considering Miller-Moore Equine Enterprises (MMEE), which is currently selling for $40 per share. You also notice that a call option with a $40 strike price and six months to maturity is available. The premium is $4.00, and MMEE pays no dividends. What is your annualized return from these two investments if, in six months, MMEE is selling for $48 per share? What about $36 per share?
Strike Price In finance, the strike price of an option is the fixed price at which the owner of the option can buy, or sell, the underlying security or commodity.Maturity Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...
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A call option is a type of financial contract that gives the holder the right, but not the obligation, to buy an underlying asset (such as a stock, commodity, or currency) at a specified price (called the strike price) within a specified period of time.
When an investor purchases a call option, they are essentially betting that the price of the underlying asset will rise above the strike price before the option\'s expiration date. If the price of the asset does rise above the strike price, the investor can exercise the option by buying the asset at the strike price and then selling it at the higher market price, thereby earning a profit.
Call options are often used as a speculative investment strategy, as they allow investors to potentially profit from the upward movement of an asset without having to actually own the asset itself. They are also commonly used as a hedging tool to protect against potential losses in a portfolio.
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