Problem 15

Intro

An investor believes that the Cisco stock price is going to increase in the following 12 months from the current stock price of $200. Call options on Cisco stock expiring in 12 months have a strike price of $216 and sell at a premium of $20 each. The investor has $17,000 to invest, and is considering 3 alternatives:

1. Purchase 850 call options.

2. Purchase 85 shares.

3. Invest $15,300 in a money market fund returning 8% per year and buy 85 call options with the remaining money.

Assume that the stock price will be $238 per share after 12 months.

Attempt 1/3 for 10 pts.

Part 1

What will be the investor's rate of return for alternative 1?

3+ decimals

Attempt 1/3 for 10 pts.

Part 2

What will be the investor's rate of return for alternative 2?

3+ decimals

Attempt 1/3 for 10 pts.

Part 3

What will be the investor's rate of return for alternative 3?

3+ decimals