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Suppose you think Tesla stock is going to appreciate substantially in value in the next year. Say the stock's current price, S, is $400, and
Suppose you think Tesla stock is going to appreciate substantially in value in the next year. Say the stock's current price, S, is $400, and a call option expiring in one year has an exercise price, X, of $390 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 10% annual interest. Suppose Tesla stock goes up in price to $450 one year lat a. What is total value of the investment for alternative A ? (sample answer: \$1850.75) b. What is your rate of return of the investment for alternative A ? (sample answer: 25.45% or 25.45% if it's negative) c. What is total value of the investment for alternative B ? (sample answer: \$1850.75) d. What is your rate of return for alternative B ? (sample answer: 25.30%, or 25.30% ) e. What is total value of the investment for alternative C ? sample answer: \$1850.75) f. What is your rate of return for alternative C ? (sample answer: 25.30%, or 25.30% )
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