Suppose you think Apple stock is going to appreciate substantially in value in the next year....

Suppose you think Apple stock is going to appreciate substantially in value in the next year. Say the stock’s current price, S₀, is $200, and a call option expiring in one year 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 in 6 months? (Leave no cells blank - be certain to enter "0" wherever required. Negative amounts should be indicated by a minus sign. Round the "Percentage return of your portfolio (Bills + 100 options)" answers to 2 decimal places.)

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

Solutions

Expert Solution

jeff jeffy answered 1 year ago

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