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Suppose you think AppX stock is going to appreciate substantially in value in the next year. Say the stocks current price, S 0 , is
Suppose you think AppX stock is going to appreciate substantially in value in the next year. Say the stocks current price, S0, is $100, and the 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:
- Invest all $10,000 in the stock, buying 100 shares.
- Invest all $10,000 in 1,000 options (10 contracts).
- Buy 100 options (one contract) for $1,000 and invest the remaining $9,000 in a money market fund paying 4% interest annually.
a. Calculate the value of the investment for stock price one year from now? (Leave no cells blank - be certain to enter "0" wherever required.)
Price of Stock 1 Year from Now $100 $110 $80 $120 a. All stocks (100 shares) b. All options (1,000 shares) c. Bills + 100 options b. Calculate the rate of return on investment for stock price one year from now? (Leave no cells blank - be certain to enter "O" wherever required. Negative values should be indicated by a minus sign. Round your answers to 1 decimal place.) $80 $110 $120 Price of Stock 1 Year from Now $100 % % a. All stocks (100 shares) b. All options (1,000 shares) c. Bills + 100 options % % % % % % % % % %
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