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 $100, and the call option expiring in 6 months has an exercise price, X, of $100 and is selling at a price, C, of $10. With $10,000 to invest, you are considering three alternatives.

Buy 100 options (one contract) for $1,000, and invest the remaining $9,000 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.)

         

    

   

The percentage return of your portfolio in six months for each of the following stock prices is:

  

a. Invest all $10,000 in the stock, buying 100 shares. b. Invest all $10,000 in 1,000 options (10 contracts). c.

Buy 100 options (one contract) for $1,000, and invest the remaining $9,000 in a money market fund paying 4% in interest over 6 months (8% per year).

Explanation / Answer

The total value of your portfolio in six months for each of the following stock prices is: Price of Stock 6 Months from Now Stock Price 80 100 110 120 All stocks (100 shares)           8,000        10,000        11,000        12,000 All options (1,000 options)                  -                    -          10,000        20,000 Bills + 100 options           9,360           9,360        10,360        11,360 The percentage return of your portfolio in six months for each of the following stock prices is: Price of Stock 6 Months from Now Stock Price 80 100 110 120 All stocks (100 shares) -40% 0% 20% 40% All options (1,000 options) -200% -200% 0% 200% Bills + 100 options -12.80% -12.80% 7.20% 27.20% a b c Shares               100 Options           1,000              100 Rate               100                 10                 10 Value         10,000        10,000           1,000 4% Money Market           9,000

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