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
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 $224 and sell at a premium of $20 each. The investor has $10,000 to invest, and is considering 3 alternatives:
- Purchase 500 call options.
- Purchase 50 shares.
- Invest $9,000 in a money market fund returning 7% per year and buy 50 call options with the remaining money. Assume that the stock price will be $232 per share after 12 months.
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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