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Suppose you think FedEx stock is going to appreciate substantially in value in the next year. Say the stock's current price, S_0, is $100, and
Suppose you think FedEx stock is going to appreciate substantially in value in the next year. Say the stock's current price, S_0, 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: 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% interest annually. a. Calculate the value of the investment for stock price one year from now? b. Calculate the rate of return on investment for stock price one year from now
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