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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, S, is $75, and
Suppose you think Apple stock is going to appreciate substantially in value in the next year. Say the stock's current price, S, is $75, and a call option expiring in one year has an exercise price, X, of $75 and is selling at a price, C, of $21. With $21,000 to invest, you are considering three alternatives. a. Invest all $21,000 in the stock, buying 280 shares. b. Invest all $21,000 in 1,000 options (10 contracts). c. Buy 100 options (one contract) for $2,100, and invest the remaining $18,900 in a money market fund paying 6% in interest over 6 months (12% per year). What is your rate of return for each alternative for the following four stock prices in 6 months? (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 55 $ 75 $ 85 $ $ 95 Stock Price All stocks (280 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 55 $ 75 $ 85 % % % $ 95 % Stock Price All stocks (280 shares) All options (1,000 options) Bills + 100 options
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