Reference no: EM133188288
Question - Suppose you think Tesla stock is going to appreciate substantially in value in the next year. Say the stock's current price, S, is $400, and a call option expiring in one year has an exercise price, X, of $390 and is selling at a price, C, of $40. With $40,000 to invest, you are considering three investment alternatives.
Alternative A: Invest all $40,000 in the stock, buying 100 shares.
Alternative B: Invest all $40,000 in 1,000 options (10 contracts).
Alternative C: Buy 100 options (one contract) for $4,000, and invest the remaining fund in a money market fund paying 10% annual interest.
Suppose Tesla stock goes up in price to $500 one year later.
a. What is total value of the investment for alternative A?
b. What is your rate of return of the investment for alternative A?
c. What is total value of the investment for alternative B?
d. What is your rate of return for alternative B?
e. What is total value of the investment for alternative C?
f. What is your rate of return for alternative C?
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