Problem 20-6

Suppose you think FedEx stock is going to appreciate substantially in value in the next 6 months. Say the stocks current price, S₀, is $125, and the call option expiring in 6 months has an exercise price, X, of $125 and is selling at a price, C, of $8. With $16,000 to invest, you are considering three alternatives.

a.	Invest all $16,000 in the stock, buying 128 shares.
b.	Invest all $16,000 in 2,000 options (20 contracts).
c.	Buy 100 options (one contract) for $800, and invest the remaining $15,200 in a money market fund paying 5% in interest over 6 months (10% per year).

What is your rate of return for each alternative for the following four stock prices 6 months from now? (Leave no cells blank - be certain to enter "0" wherever required. Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places. Omit the "$" and "%" signs in your response.)

The total value of your portfolio in six months for each of the following stock prices is:

	Price of Stock 6 Months from Now
Stock Price	$105		$125		$135		$145
All stocks (128 shares)	13440$		16000$		17280$		18560$
All options (2,000 options)	0$		0$		20000$		40000$
Bills + 100 options	$		$		$		$

The percentage return of your portfolio in six months for each of the following stock prices is:

	Price of Stock 6 Months from Now
Stock Price	$105		$125		$135		$145
All stocks (128 shares)	-16 %		0 %		8 %		16 %
All options (2,000 options)	-100 %		-100 %		%		%
Bills + 100 options	%		%		%		%