Suppose you think FedEx stock is going to appreciate substantially in value in t

Question

Suppose you think FedEx stock is going to appreciate substantially in value in the next 6 months. Say the stock's current price, Sq, 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 $21. With $21,000 to invest, you are considering three alternatives. Invest all $21,000 in the stock, buying 280 shares. Invest all $21,000 in 1,000 options (10 contracts). Buy 100 options (one contract) for $2,100, and invest the remaining $18,900 in a money market fund paying 6% in interest over 6 months (12% per year). What is your rate of return for each alternative for the following four stock prices 6 months from now? (Leave no cells blank - be certain to enter "0" wherever required. Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places. Omit the "$" and signs "%" in your response.) The total value of your portfolio in six months for each of the following stock prices is: The percentage return of your portfolio in six months for each of the following stock prices is:

Explanation / Answer

Solution has both the profit and return shown below with formulas:

Particulars Formula 55 75 85 95 All stock No of shares (21000/75) 280 Cost 21000 21000 21000 21000 6 months(280*6 months price) 15400 21000 23800 26600 Loss -5600 0 2800 5600 Return (6 months- current )/current -26.67% 0.00% 13.33% 26.67% All options Exercise No No Yes Yes Cost 21000 21000 21000 21000 Loss/cost = premium -21000 -21000 -21000 -21000 Profit 0 0 10000 20000 Net profit/Loss -21000 -21000 -11000 -1000 Return 100% 100% -52.83% -4.76% Options + bills Cost of option -2100 -2100 -2100 -2100 Exercise No No Yes Yes Profit 0 0 1000 2000 Bills cost -18900 -18900 -18900 -18900 Bills profit 6% on 18900 1134 1134 1134 1134 Net profit -966 -966 34 1034 Return -4.60% -4.60% 0.16% 4.92%

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