Suppose you think Tesla stock is going to appreciate substantially in value in the next year. Say the stocks current price, S, is $400, and a call option expiring in one year has an exercise price, X, of $380 and is selling at a price, C, of $40. With $40,000 to invest, you are considering three investment alternatives. Alternative A: Invest all $40,000 in the stock, buying 100 shares. Alternative B: Invest all $40,000 in 1,000 options (10 contracts). Alternative C: Buy 100 options (one contract) for $4,000, and invest the remaining fund in a money market fund paying 8% annual interest.

Suppose Tesla stock goes up in price to $500 one year later.

a. What is total value of the investment for alternative B?[s](sample answer: $1850.75)

b. What is your rate of return for alternative B?[t](sample answer: 25.30%)

c. What is total value of the investment for alternative C?[u](sample answer: $1850.75)

d. What is your rate of return for alternative C?[v](sample answer: 25.30%)