Question
Help with the problem below. The one in the website is wrong. 1. Suppose you face the following situation. You have saved $20,000 for next
Help with the problem below. The one in the website is wrong.
1. Suppose you face the following situation. You have saved $20,000 for next year's tuition ($14,000) and expenses ($6,000) in a bank account earning 5%. But you now see an opportunity to do more with the money during the month between now and the start of the next semester. You are convinced that Electric Arts, which sells for $20 per share is a great buy, however, you cant afford to have less than $18,000 by next month, or you wont be able to pay for enough courses to graduate (youll eat a lot of spaghetti and save $2000 in expenses if you have to). Given this setting, note the good and bad points of each of the strategies below. Which of the potential strategies below is the best alternative?
a. You buy 1000 shares.
b. You buy 1000 shares and sell 10 call option contracts, each with a strike price of $25 and a premium of $5.
c. You buy 10 call option contracts each with a strike price of $27 and a premium of $2.
d. You buy 1000 shares and sell 10 call option contracts, each with a strike price of $25 and a premium of $5 and buy 10 put option contracts, each with a strike price of $18 and a premium of $5.
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