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FIN - You are thinking of investing in a stock that is selling for $60

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Question;You are thinking of investing in a stock that is selling for $60 and that you think will go up in price over the next six months. The six-month call option with exercise price = $60 sells for a premium of $5. The risk-free rate is 1% annually. Consider the following strategies for investing $5,000:(i) invest everything in the stock(ii) invest everything in the call options(iii) invest $1,000 in the call option and the rest in the risk-free rate(a) create a table that shows the rate of return on each investment if the following stock prices occur in six months: 30, 40, 50, 60, 70, 80, 90, 100(b) draw a chart that shows how the rate of return varies with the stock price for each of the investment alternatives

 

Paper#49483 | Written in 18-Jul-2015

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