Reference no: EM132491390
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 $100, and the call option expiring in 6 months has an exercise price, X, of $100 and is selling at a price, C, of $10. With $10,000 to invest, you are considering three alternatives.
a. Invest all $10,000 in the stock, buying 100 shares.
b. Invest all $10,000 in 1,000 options (10 contracts).
c. Buy 100 options (one contract) for $1,000, and invest the remaining $9,000 in a money market fund paying 4% in interest over 6 months (8% per year).
What is your rate of return for each alternative for the following four stock prices 6 months from now?
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