Reference no: EM132828561
A stock's current price, Soi) Invest all $10,000 in the stock, buying 1,000 shares; is $100. The call option expiring in 1 year has an exercise price X ($100) and is selling at $10. Having $10,000, consider to invest
ii) Invest $10,000 in 1,000 options (100 shares x 10 contracts);
iii) Buy 100 options (100 shares x 1 contract) for $1,000 and invest the remaining $9,000 in T-bill paying 4% interest annually.
One year later, the stock prices have 4 alternative stock prices of $80, $100, $110 and $120.
a) Construct a table to summarize for dollar return and rate of return for i), ii) and iii) at stock prices of $80, $100, $110 and $120. Show calculations.
b) Construct the profit and payoff diagrams.
c) Evaluate the outcomes of these three investment strategies.
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