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Suppose that you plan to invest in stock A, because you believe that stock A will appreciate in the next 6 months. The stock current price is $100, and a call option on stock A expiring in 6 months has an exercise price of $100 selling at $15 per option. And you have $7500 in hand to invest the following three strategies:
A: Invest entirely in stock A.
B: Invest entirely in call option on stock A.
C: Buy call options the amount of calls is same as the number of shares we purchase in strategy A, and invest the remaining money in T-bills at interest rate whose annual interest rate is 10%.
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Order Paper NowSuppose that the possible stock price are $90, $100, $110, and $120.
(a) At expiration (after 6 months), compute the rates of return for each strategy given different possible stock prices. We don’t consider the premium we’ve paid for holding call options in this case.
(b) Given different stock price at expiration, which strategy would you like to choose? For example, if the stock price is $90, which one would you choose to invest in? If the stock price is $100, which one would you choose to invest in? So on and so forth.
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