Question
You invested in 1,000 shares of stock ABC. Current stock price is $35; there is no dividend; interest rate is 5%. You are planning to
You invested in 1,000 shares of stock ABC. Current stock price is $35; there is no dividend; interest rate is 5%. You are planning to buy a house in one year, which will require a down payment of $36,000. And you will need to sell the shares in one year and use the proceeds as down payment. In order to be able to sell your shares in one year for at least $36/share, you are considering use 1-year European options on 1000 shares and will choose one of the four available options on the stock: call with strike $33; call with strike $38; put with strike $33; and put with strike $38. Which option and what option position would you use? Please explain. For the option you choose, what is range of the option premium to guarantee that you can make your down payment in one year? (6 point)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started