Refer to the stock options on Apple in the Figure 2.9. Suppose you buy an Octobe
ID: 2722828 • Letter: R
Question
Refer to the stock options on Apple in the Figure 2.9. Suppose you buy an October expiration call option with exercise price $360. a-1. If the stock price in October is $370, will you exercise your call? Yes No a-2. What is the net profit/loss on your position? (Input the amount as a positive value.) $ a-3. What is the rate of return on your position? (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.) Rate of return % b-1. Would you exercise the call if you had bought the October call with the exercise price $355? Yes No b-2. What is the net profit/loss on your position? (Input the amount as a positive value.) $ b-3. What is the rate of return on your position? (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.) Rate of return % c-1. What if you had bought an October put with an exercise price of $360 instead? Would you exercise the put at a stock price of $360? Yes No c-2. What is the rate of return on your position? (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.) Rate of return $ %
Explanation / Answer
Answer:a-1 Yes
Answer:a-2 Net loss=490
Answer:a-3 Rate of Return=-19.68%
Answer:b-1 Yes
Answer:b-2 Net loss=941
Answer:b-3 Rate of Return=-48.48%
Answer:c-1 No
Answer:c-2 Rate of Return=-100%
Working notes:
a.Yes. As long as the stock price at expiration exceeds the exercise price, it makes sense to exercise the call. Gross profit is: ($370 - $350) 100 shares = $2,000
Net profit = ($20 - $24.90) 100 shares = $490 loss
Rate of return = -$4.90/$24.90 = -0.1968 or 19.68% loss
b. Yes, exercise. Gross profit is:
($370 - $360) 100 shares = $1,000
Net profit = ($10 - $19.41) 100 shares = $941 loss
Rate of return = -$9.41/$19.41 = -0.4848 or 48.48% loss
c. A put with an exercise price of $350 would expire worthless for any stock price equal to or greater than $350. An investor in such a put would have a rate of return over the holding period of -100%.
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