Suppose you think FedEx stock is going to appreciate substantially in value in the next 6 months. Say the stock’s current price, S0, is $75, and the call option expiring in 6 months has an exercise price, X, of $75 and is selling at a price, C, of $10. With $15,000 to invest, you are considering three alternatives.
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a. |
Invest all $15,000 in the stock, buying 200 shares. |
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b. |
Invest all $15,000 in 1,500 options (15 contracts). |
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c. |
Buy 100 options (one contract) for $1,000, and invest the remaining $14,000 in a money market fund paying 4% in interest over 6 months (8% per year). |
What is your rate of return for each alternative for the following four stock prices 6 months from now? (Leave no cells blank – be certain to enter “0” wherever required. Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places. Omit the “$” and “%” signs in your response.)
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Price of Stock 6 Months from now |
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Stock Price |
$ 55 |
$ 75 |
$ 85 |
$ 95 |
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|
All Stocks (200 Shares) |
$ |
$ |
$ |
$ |
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|
All options (1,500 options) |
$ |
$ |
$ |
$ |
|||
|
Bills + 100 options |
$ |
$ |
$ |
$ |
|||
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The percentage return of your portfolio in six months for each of the following stock prices is: |
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|
Price of Stock 6 Months from Now |
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|
Stock Price |
$ 55 |
$ 75 |
$ 85 |
$ 95 |
|||
|
All Stocks (200 Shares) |
% |
% |
% |
% |
|||
|
All options (1,500 options) |
% |
% |
% |
% |
|||
|
Bills + 100 options |
% |
% |
% |
% |
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