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, S0, is $125, and the call option expiring in 6 months has an exercise price, X, of $125 and is selling at a price, C, of $13. With $39,000 to invest, you are considering three alternatives. a. Invest all $39,000 in the stock, buying 312 shares. b. Invest all $39,000 in 3,000 options (30 contracts). c. Buy 100 options (one contract) for $1,300, and invest the remaining $37,700 in a money market fund paying 4% in interest over 6 months (8% per year). What is your rate of return for each alternative for the following four stock prices 6 months from now? (Leave no cells blank - be certain to enter "0" wherever required. Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places. Omit the "$" and "%" signs in your response.)

Explanation / Answer

Please not that Stock prices after six months, has not been provided, hence $115, $125, $130, $135 are considered as probable prices of FedEx stock. Accordingly rate of return at diferent level of price computed as below. Present FedEx Stock price = P0 = $125, Price of Call option of EP 125, is $13 per option.

Reurn on portfolio:   

Market value of portfolio in various alternatives. Stock Price ($) MP $115 MP $125 MP $130 MP $135 All Stock (312 shares) 312 x 115= 35880 312 x 125 = 39000 312 x 130= 40560 312 x 135= 42120 All options (1000 options) 0 0 3000x (130-125)=     15,000 3000x (135-125)= 30000 Bill + 100 Options 37700 x1.04 + 0= 39208 37700 x1.04 + 0= 39208 37700 x1.04 + 100x5= 39708 37700 x1.04 + 100x10= 40208

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