Suppose you think a stock, currently selling for $100, will appreciate.

A 6

-

month call

option

costs $10

per share

(contract size is 100 shares).

You have $10,000 to invest.

N

ow consider the following three strategies:

Strategy A

: Invest entirely in stock. Buy 100 shares, each selling for $100.

Strategy B

: Invest entirely in at

-

the

-

money call options. Buy 1,000 calls, each

selling for $10. (This would require 10 contracts, eac

h for 100 shares.)

Strategy C

: Purchase 100 call options for $1,000. Invest your remaining $9,000

in 6

-

month T

-

bills, to earn 3% interest. The bills will be worth $9,270 at

expiration.

a

.

For these strategies, c

alculate the percentage return

if

stock price

changes to $95,

$100, $105, $110, $115, $120.

b.

Discuss the

relative

advantages and disadvantages of

these three strategies.