Question

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

Answer 1