Minimum possible payoffs and returns for three strategies

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Reference no: EM131616616

Suppose you think that Boeing (BA) stock is going to appreciate substantially in value over the next 1.5 months. The stock's current price is S0 = 87.37. The call option expiring in 1.5 months with exercise price X = 85 is trading at an option premium of C = 5.00. You have 10,000 to invest and are considering three alternatives:

1) All stocks: invest all 10,000 in the stock (you buy 114.46 shares).

2) All options: invest all 10,000 in options (you buy 2,000 options).

3) Bills and options: buy 114 options for 570 and invest the remaining 9,430 in a money market fund that pays 4% (annual rate) in interest. Assume that this means that over the 1.5 months of your investment the money market fund pays 0.5% in interest.

a. What is the payoff and rate of return for each alternative (1-3) for the following 3 stock prices in 1.5 months: 85, 90, 95? Summarize your results in a table.

b. What are the minimum possible payoffs and returns for the three strategies?

The minimum possible payoff to the three strategies is:

Reference no: EM131616616

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