Question
A company called Atlantic exists and has a current stock price of $25 per share. Suppose you have $1,000 to invest and consider these two
A company called Atlantic exists and has a current stock price of $25 per share. Suppose you have $1,000 to invest and consider these two possibilities; (1) use all $1,000 to buy shares in Atlantic long, or (2) use all $1,000 to buy call options on Atlantic with a strike price of $25 and a premium of $5. Which of the following is TRUE if just prior to expiration of the call options the price of Atlantic rises to $30? Assume that with possibility (1) you sell all your shares at $30.
a. | (1) provides a return of 20% while (2) provides a return of 0% | |
b. | (1) provides a return of 20% while (2) provides a return of -100% | |
c. | (1) provides a return of 5% while (2) provides a return of 50% | |
d. | (1) provides a return of 5% while (2) provides a return of -100% | |
e. | (1) provides a return of 20% while (2) provides a return of 50% |
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