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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, Se, is $120, and
Suppose you think Apple stock is going to appreciate substantially in value in the next year. Say the stock's current price, Se, is $120, and a call option expiring in one year has an exercise price, X, of $120 and is selling at a price, C, of $5. With $12,000 to invest, you are considering three alternatives. a. Invest all $12,000 in the stock, buying 100 shares. b. Invest all $12,000 in 2,400 options (24 contracts). C. Buy 100 options (one contract) for $500, and invest the remaining $11,500 in a money market fund paying 5% in interest over 6 months (10% 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 "0" 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 100 $ 120 $ 130 $ 140 Stock Price All stocks (100 shares) All options (2.400 options) Bills + 100 options The percentage return of your portfolio in six months for each of the following stock prices is: 100 Price of Stock 6 Months from Now $ 20 $ 130 % $ 140 % Stock Price All stocks (100 shares) All options (2.400 options) Bills + 100 options
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