Investments and Derivatives Strategies

Wamu is a 30-year aged lecturer and a father of none, He considers himself as savoir-faire Finance personality. His investment portfolio has increased to a greater extent in the few past years, although he has been fairly conservative with his investments, he now feels more confident in his investment knowledge and would like to branch out into some new areas that could bring higher returns. He has about ZMW30, 000 to invest.

Attracted to the hot market for technology stocks, Wamu is interested in purchasing a tech

IPO stock and identified Liquid Telecom, a company that makes complicated computer chips for wireless Internet connections, as a likely prospect. The 1-year-old company had received some favorable press when it got early-stage financing and again when its chip was accepted by a major cell phone manufacturer.

Wamu also was considering an investment in 500 shares of Emperor Palace International Casino common stock, currently selling for ZMW 64 per share. After a discussion with Floro who is an economist with the Zambia Revenue Authority, Wamu believes that the long-running bull market is due to cool off and that economic activity will slow down. With the aid of Pangaea Securities his brokers, Wamu researches Emperor Palace International's current financial situation and finds that the future success of the company may be tied to an outcome of pending court proceedings on the firm's application to open a new floating casino on a nearby river. If the permit is granted, it seems likely that the firm's stock will experience a rapid increase in value, regardless of economic conditions. On the other hand, if the company fails to get the permit, the falling stock price will make it a good candidate for a short sale.

The following Options were open for Wamu:

Option 1: Wamu can invest ZMW30, 000 in Liquid Telecom when it goes public.

Option 2: He can follow closely and buy Emperor Palace International shares now at ZMW54 per share.

Option 3: Wamu can Short Sell Emperor Palace shares at ZMW64 that's with the expectation that the fortunes for the company will change to the worst.

Option 4: Wait to see what happens with the casino permit and then decide whether to buy or short sell the Emperor Palace International stock.

Questions

a. Give an evaluation of each of the above Options and based on the scarce information given, provide a recommendation for the option you feel is the best. (7 Marks)

b. If Emperor Palace International's stock price rises to ZMW70, what are the results under Options 2 and 3 what advantages and disadvantages do you attach to each result as an investment person. (4 Marks)

c. If there is a drop in the stock price of ZMW15, what will happen under Options 2 and 3? Give an evaluation of the Advantages and disadvantages of the option outcomes. (4 Marks)