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Suppose you think Apple stock is going to appreciate substantially in value in the next year. Say the stock's current price, So, is $100, and
Suppose you think Apple stock is going to appreciate substantially in value in the next year. Say 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. a. Invest all $10,000 in the stock, buying 100 shares. b. Invest all $10,000 in 1,000 options (10 contracts). c. Buy 100 options (one contract) for $1,000, and invest the remaining $9,000 in a money market fund paying 4% annual interest. What is your rate of return for each alternative for the following four stock prices in one year? (Leave no cells blank - be certain to enter "O" wherever required. Negative amounts should be indicated by a minus sign. Round the "Percentage return of your portfolio (Bills + 100 options)" answers to 2 decimal places.) The total value of your portfolio in six months for each of the following stock prices is: Price of Stock 6 Months from Now 80 $ - 100 $ 110 Stock Price $ 120 All stocks (100 shares) All options (1,000 options) 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 800 $ 100 $ 10 Stock Price | $ $ 120 | % All stocks (100 shares) All options (1,000 options) Bills + 100 options
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