Question
Suppose you think AppX stock is going to appreciate substantially in value in the next year. Say the stocks current price, S0 , is $90,
Suppose you think AppX stock is going to appreciate substantially in value in the next year. Say the stocks current price, S0 , is $90, and the call option expiring in one year has an exercise price, K, of $100 and is selling at a price, X, of $10. With $18,000 to invest, you are considering three alternatives. What are the rates of returns for each alternative investments when the future price of the AppX stock is $80, and when the future price of the AppX stock is $120.
a. Invest all $18,000 in the stock, buying 200 shares.
b. Invest all $18,000 in 1,800 options.
c. Buy 1000 options for $10,000 and invest the remaining $8,000 in a money market fund paying 5% interest annually.
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