Question
ABC stock has current price (So): $140/share. Investors hold a portfolio of assets: * ABC stock 100000 shares * Money of 10 billion USD Investors
ABC stock has current price (So): $140/share.
Investors hold a portfolio of assets:
* ABC stock 100000 shares
* Money of 10 billion USD
Investors own the option to buy ABC shares
* Trading quantity is 100,000 shares
* Exercise price is $100/share
* American-style options, expiring on May 29, January +1
Investors can make term deposits at banks with interest rates: 10%/year, paid at the end of the term
Suppose, the company issuing shares ABC does not pay dividends within the next year.
Investors consider 1 of 3 investment strategies as follows:
(1) Sell currently held shares, then deposit all proceeds to the bank along with the existing cash balance, for a term of 1 year and keep the call option until maturity
(2) Exercise the buy option now (May 30/N), and continue to hold all existing shares until May 29/Y+1
(3) Deposit all available money to the bank, and continue to hold existing shares and purchase options until May 29/N+1
Set up an expression to calculate the value received by the investor on May 29/N+1 according to St for each strategy.
{St is the future price of ABC stock after 1 year, unit: USD/share}
Is it possible to identify investment strategies that should not be implemented? Why?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Expressions for Each Strategy Strategy 1 Sell all shares 100000 So 100000 140 14 billion Deposit all proceeds and cash 14 billion 10 billion 24 billio...Get Instant Access to Expert-Tailored Solutions
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Step: 2
Step: 3
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