Question
Cisco stock price is $20 per share now. Investor A expects the stock price to go up because of the 5G technology breakthrough. With $10,000
Cisco stock price is $20 per share now. Investor A expects the stock price to go up because of the 5G technology breakthrough. With $10,000 available, investor A will choose from the following alternative investment strategies to make profit from the price change.
1) He will invest all the money buying Cisco stocks at the current price $20. In one month, if the stock price of Cisco increases to $25, what is his total dollar amount profit? (4 points)
2) Instead, he will invest all the money buying call option of Cisco stock at a premium of C=$1.5 per share with strike price $19 and one month maturity. In one month, if the stock price of Cisco increases to $25, what is his total dollar amount profit / loss? (4 points)
3) Instead, he will write 10,000 put options on Cisco stock at a premium of P=$0.5 per share with strike price of $20 and one month maturity date. In one month, if the stock price of Cisco increases to $25, what would be his total dollar amount profit / loss? (4 points)
4) Investor A did exactly the same transactions as above, but stock price of Cisco drops to $5 at the end of the month because of unexpected CEOs scandal. Recalculate the dollar amount of profit/loss of Investor A under all the previousthree different investment strategies. (5 points)
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