Question
Garthurst in his capacity as an analyst at Third Global Investments has been looking at a listed company called Wireless Ltd. Garthurst believes Wireless Ltds
Garthurst in his capacity as an analyst at Third Global Investments has been looking at a listed company called Wireless Ltd. Garthurst believes Wireless Ltds share price will rise over next 2 months. The issue is that Global Investments does not have the cash flow required to buy the share now. The current share price of Wireless Ltd is $35.00. There are call options listed on the exchange with an expiry of 2 months, an exercise price of $40.00 and a premium of $2.25. (a) In order for Third Global Investments to benefit from Garthursts assessment of Wireless Ltd, should a long or a short position be taken in the call option? What will be the initial cash flow from this position? (2 marks) (b) Calculate the breakeven point, and the profit/loss when the market price is $45 as well as $35. (4 marks) (c) Is there a way Third Global Investments could have profited from an expected price increase using put options? If so, explain how. (2 marks)
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