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1. You believe the price for a stock, currently selling for $24, is going to increase to $37 in the next 60 days and you
1. You believe the price for a stock, currently selling for $24, is going to increase to $37 in the next 60 days and you want to try to profit from this. The stock's volatility is 53.87% and the risk-free rate is 2.2%. You do not own the stock but want to profit from this increase. The following derivatives, each of which expires in 60 days and is based on 100 shares of the stock, are available on this stock: A future with a future price of $29. The initial margin is $500 and the maintenance margin is $400. A put option with a strike price of $28.50. Its premium is $5.25. A call option with a strike price of $32. Its premium is $0.30 a. Do you want to hedge or speculate on this stock? Why? (2 points) b. Based on your expectations, explain which derivative would you use to achieve your investment objective. Be sure to include the position you would take in the derivative in your response. (4 points) Assume the stock price does increase, but only to $31 at expiration. i. For your chosen derivative and position from b, calculate the payoff and the P&L. (6 points) ii. Based on your calculations, how well did you achieve your objective? (3 points)
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