Martin has $100 and would like to buy shares of ABC stock. The current price ABC...

Martin has $100 and would like to buy shares of ABC stock. The current price ABC stock is $100 per share and he believes that it will go up by 5% in a month. He is considering buying one-month call options on ABC stock. A one-month call option on ABC stock with strike price being $102 costs $2. What is the profit for Martin should the share price of ABC stock do go up by 5% in a month? (5 points). If you were Martin, will you buy the option? Explain. (5 points

Expert Solution

share price after a month if it goes up by 5% = current price*(1+rate of increase) = $100*(1+0.05) = $100*1.05 = $105

profit for Martin = profit from stock + profit from call option

profit from call option = stock price at call expiration - strike price - cost of call option

profit from stock = stock price after a month - current stock price

profit for Martin = ($105 - $100) + ($105 - $102 - $2) = $5 + $1 = $6

If you were Martin, you will buy the option because there is a profit of $6. but if you are not 100% sure for stock price go up by 5% in a month then it would be sensible to buy a put option. A put option gives the payoff if stock price at expiration of the put option is lower than strike price of put option. so if stock price at expiration is higher than strike price of the option then only cost of purchasing the option will be lost. this loss will be compensated by profit from underlying stock.

jeff jeffy answered 1 year ago

a. Assume that you would like to buy 100 shares of a stock that is currently...

a. Assume that you would like to buy 100 shares of a stock that is currently priced at $ 70. The initial margin is 75% and maintenance margin is 35%. How much would the total purchase amount to in dollars. How much in total cash of your own do you need in dollars in this example? How much will you be able to borrow in dollars in this example? b. Show your total dollar amount of investment and your results...

An investor purchases 300 shares of ABC stock on margin. The current price of ABC stock...

An investor purchases 300 shares of ABC stock on margin. The current price of ABC stock is $70 per share, the initial margin requirement is 60% and the maintenance margin requirement is 35%. A) What is the dollar amount of the loan the investor receives from her broker for this margin purchase? B) How far can the stock price fall before the investor gets a margin call?

Company ABC has 10,000 shares outstanding and the stock price is $100. The company is expected...

Company ABC has 10,000 shares outstanding and the stock price is $100. The company is expected to pay a dividend of $10 per share next year and thereafter the dividend is expected to grow indefinitely by 6% a year. The company now makes an announcement: It will repurchase shares next year instead of issuing cash dividends. But from year 2 on the payout policy stays the same. (8 points) a. What is the expected rate of return on the stock?...

1. An investor purchases 200 shares of ABC stock on margin. The current price of ABC...

1. An investor purchases 200 shares of ABC stock on margin. The current price of ABC stock is $85 per share, the initial margin requirement is 60% and the maintenance margin requirement is 25%. A) What is the dollar amount of the loan the investor receives from her broker for this margin purchase? B) How far can the stock price fall before the investor gets a margin call

You would like to buy shares of a particular company. The current bid quote is $30.50...

You would like to buy shares of a particular company. The current bid quote is $30.50 and the current ask quote is $30.75. If the stock trade fee is $10 per trade, then you would need $3,085 to buy 100 shares. True or False If the average PE ratio for the electrical utility industry is 21.5 and earnings per share for Midwest Energy is $2.34, then the current price of Blazer's stock is more than $50.68 but less than $50.94...

Mr. Suphi buys 100 shares of ABC stock on margin. The share price is $50 and...

Mr. Suphi buys 100 shares of ABC stock on margin. The share price is $50 and the initial margin is 50%. What is the maintenance margin on the account if the margin call is triggered at a share price of $35? Ignore the interest on the loan. b) Mr. Suphi buys 200 shares of EFG stock on margin. The share price is $60 and the initial margin is 50%. What is Mr. Suphi’s rate of return on equity if he...

ABC Company's current stock price is $100. The risk free rate is 4% a) The maximum...

ABC Company's current stock price is $100. The risk free rate is 4% a) The maximum value of a European put option with an exercise price of $50 and 6 months remaining till expiration is closest to? b)The minimum value of an American call option with an exercise price of $80 and 6 months till expiration is closest to?

You buy 100 shares of Apple common stock at a price of $55.75. One quarter later,...

You buy 100 shares of Apple common stock at a price of $55.75. One quarter later, you collect a dividend of $1.51 per share and sell your stock for $66.38 per share. What is the rate of return on your investment? (You may ignore commissions and taxes.) Do not round at intermediate steps in your calculation. Express your answer in percent. Round to two decimal places. Do not type the % symbol. If the return is negative, then include a...

You buy 100 shares of Apple common stock at a price of $60.98. One quarter later,...

You buy 100 shares of Apple common stock at a price of $60.98. One quarter later, you collect a dividend of $1.73 per share and sell your stock for $67.44 per share. What is the rate of return on your investment? (You may ignore commissions and taxes.) Do not round at intermediate steps in your calculation. Express your answer in percent. Round to two decimal places. Do not type the % symbol. If the return is negative, then include a...

An investor owns 12000 shares of a particular stock. The current market price is 100.what is...

An investor owns 12000 shares of a particular stock. The current market price is 100.what is the "worst case" value of the portfolio in six months. For the purpose of this question, define the worst case value of the portfolio as the value which is such that there is only a 1% chance of the actual value being lower. Assume that the expected. Return and vitality of the stock price are 8.5% and 23% respectively.

Question