Question (1) You expect a stock will rise in value in the next year. Assume the stock's current price, So, is $100, and a call option expiring in one year has an exercise price, X, of $100 and is selling at a price, C. of $10. With $10,000 to invest, you are considering three alternatives. Invest all $10,000 in the stock, buying 100 shares Invest all $10,000 in 1,000 options (10 contracts) Buy 100 options (one contract) for $1,000, and invest the remaining S9,000 in a money market fund paying 3% annual interest What is your rate of return for each alternative for the following three stock prices in one year? Summarize your results in the table below (note: ignore the transaction cost) Price of the Stock One Year from Now 95 105 110 The 3 alternatives Stocks (100 shares) Options (1000 shares) MMF (3%) + 100 option contracts Question (2) As a manager, you receive 10,000 shares of your company stock as part of your compensation. The current stock price is $40. You plan to sell your stock next December so as to prepare as a down payment for your new house. You are concerned that the stock price might go below $35, in which case your down payment might not be enough. If the stock price rises to $45, you will be satisfied enough you will have a down payment as well as some additional cash reserve. What (a) would your portfolio value assuming you establish a strategy of a zero cost collar by writing (selling) December calls on your stock (premium of $3 and a strike price of $45) and buying the December puts on your stock (premium of $3 and a strike price of $35); (b) what is the benefit of the collar strategy in your case? (note: consider the transaction cost) (a) Price of the Stock Next December $30 $40 $50 Portfolio value (b)