Question
Walmarts stock (WMT) is trading at $110 per share today. You believe that, in a year: - There is a 60% probability that the stock
Walmarts stock (WMT) is trading at $110 per share today. You believe that, in a year: - There is a 60% probability that the stock will be trading at $300 or more. - There is a 20% probability that the stock will be trading at $50 or less. - There is a 20% probability that the stock will be trading between $50 and $300.
You buy a call option today that:
- Gives you the right to purchase a share of WMT in one year, for $125.
- Costs $15 today.
What is your gain (+) or loss (-) on this trade if WMT is trading at $240 in a year? (Assume that you want to end up with only cash (not shares of WMT).
A. Consider the WMT problem above. What would your gain or loss be if you simply purchased a share today and sold it in one year?
B. Consider the WMT problem above. Assume that you decide to buy the option. What is your gain (+) or loss (-) on this trade if WMT is trading at $50 in a year?
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