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 $200, and the call option expiring in 6 months has an exercise price, X, of $200 and is selling at a price, C, of $20. With $20,000 to invest, you are considering three alternatives.

a.	Invest all $20,000 in the stock, buying 100 shares.
b.	Invest all $20,000 in 1,000 options (10 contracts).
c.	Buy 100 options (one contract) for $2,000, and invest the remaining $18,000 in a money market fund paying 5% in interest over 6 months (10% 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:

    

	Price of Stock 6 Months from Now
Stock Price	$180		$200		$210		$220
All stocks (100 shares)	$		$		$		$
All options (1,000 options)	$		$		$		$
Bills + 100 options	$		$		$		$

   

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	$180		$200		$210		$220
All stocks (100 shares)	%		%		%		%
All options (1,000 options)	%		%		%		%
Bills + 100 options	%		%		%		%

References

Answer 1

Option A: Buy 100 Shares
Share price	180	200	210	220
Value at the end of 6 months	18,000	20,000	21,000	22,000
Option B: Buy 1000 options with strike price of 200
Share price	180	200	210	220
Action taken with option	Not used	Not used	Used	Used
Gain	0	0	10	20
Value at the end of 6 months	-	-	10,000	20,000
Option C: Options + money market fund
Share price	180	200	210	220
Action taken with option	Not used	Not used	Used	Used
Gain	0	0	10	20
Value at the end of 6 months	-	-	1,000	2,000
Mutual Fund value	18900	18900	18900	18900
Total Value	18,900	18,900	19,900	20,900
Let's build the findinds in table
Portfolio Value
	180	200	210	220
Initial Investent	20,000	20,000	20,000	20,000
Option A: Buy 100 Shares	18,000	20,000	21,000	22,000
Option B: Buy 1000 options with strike price of 200	-	-	10,000	20,000
Option C: Options + money market fund	18,900	18,900	19,900	20,900
Gain/loss
	180	200	210	220
Initial Investent	20000	20000	20000	20000
Option A: Buy 100 Shares	(2,000)	-	1,000	2,000
Option B: Buy 1000 options with strike price of 200	(20,000)	(20,000)	(10,000)	-
Option C: Options + money market fund	(1,100)	(1,100)	(100)	900
Gain/loss
	180	200	210	220
Initial Investent	20000	20000	20000	20000
Option A: Buy 100 Shares	-10.00%	0.00%	5.00%	10.00%
Option B: Buy 1000 options with strike price of 200	-100.00%	-100.00%	-50.00%	0.00%
Option C: Options + money market fund	-5.50%	-5.50%	-0.50%	4.50%