Suppose you have $55,000 to invest. You’re considering Miller-Moore Equine Enter

Question

Suppose you have $55,000 to invest. You’re considering Miller-Moore Equine Enterprises (MMEE), which is currently selling for $110 per share. You also notice that a call option with a $110 strike price and six months to maturity is available. The premium is $5.5. MMEE pays no dividends. What is your annualized return from these two investments if, in six months, MMEE is selling for $118 per share? What about $106 per share?

Annualized Return Stock        Option         $118 per share % %   $106 per share % %  

Explanation / Answer

solution :

Annualized Return net Profit(loss) under stock Stock (net profit*2/110) net Profit(loss) under option Option (net profit*2/110)   $118 per share 8 14.55% 2.5 4.55%   $106 per share -12 -21.82% -5.5 -10.00%

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