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In: Finance

You have observed Mr. Jones's ownership style and you predict that Elkplain's share price will rise....

You have observed Mr. Jones's ownership style and you predict that Elkplain's share price will rise. You have $3,390 to invest and you are considering either buying shares of Elkplain or purchasing call options on the shares. The stock price is currently $17. The call option expires in three months, has a strike price of $17, and has a premium of $3.39 (per share). Assume that the stock price rises to $19.55. What is the rate of return on each investment? (Assume that you can buy a fractional quantity of shares.)

A) *15%; -25%

B) 15%; 20%

C) -5%; 15%

D) 20%; 5%

Looking for the process work to understand why the solution is A) 15%; -25%.

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Expert Solution

jeff jeffy answered 5 months ago
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