Question 7

a) The share price of Starbucks Corporation is RM90 per share, while the call option is RM9 per contract with the exercise price of RM99. When an investor buys the call option, he is entitled to purchase Starbucks Corporation share at RM99 per share. Ronald has only RM90 to invest and believes that the share price is likely to increase significantly in the near future. What are his profit and the rate of return of his investment if he invests all his money

in:

i) shares? (6 Marks)

ii) options? (6 Marks) b) Compare the leverage level of both investments as in (i) and (ii). (4 Marks)