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Exercise 1. Suppose you think a stock will appreciate in value in one year. Current price is so $100. Assume there is a call option
Exercise 1. Suppose you think a stock will appreciate in value in one year. Current price is so $100. Assume there is a call option for this stock, expiring in one year, with exercise price X $100, and selling price C = $10. With an amount of $10,000 to invest you consider three strate- gies: 1. Invest all money buying stocks 2. Invest all money buying options 3. Buy 100 options, and invest the remaining in a money market fund paying 4% annual inter- est What is the rate of return for each alternative for the following four stock prices in one year? Plot Price $ 80 $100 $110 $120 the results in a graph of rate of return as a function of the price in one year
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