Suppose you think Wal-Mart stock is going to appreciate substantially in value in the next year. Say the stocks current price is $150, and the call option expiring in one year has an exercise price of $130 and is selling at a price of $25. With $150,000 to invest, you are considering three strategies: A. Invest all $150,000 in the stock, buying 1000 shares. B. Invest all $150,000 in 6,000 options (60 contracts). C. Buy 1,000 options (10 contracts) and invest the remaining in one-year T-bills earning 2.5% interest annually.

What is your rate of return for the three strategies if the stock price one year from now is $125?

What is your rate of return for the three strategies if the stock price one year from now is $140?

What is your rate of return for the three strategies if the stock price one year from now is $170?