What will be the investor rate of return for alternative

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Question - An investor believes that the Cisco stock price is going to increase in the following 12 months from the current stock price of $200. Call options on Cisco stock expiring in 12 months have a strike price of $221 and sell at a premium of $20 each. The investor has $11,000 to invest, and is considering 3 alternatives:

Purchase 550 call options.

Purchase 55 shares.

Invest $9,900 in a money market fund returning 6% per year and buy 55 call options with the remaining money.

Assume that the stock price will be $231 per share after 12 months.

a. What will be the investor's rate of return for alternative 1?

b. What will be the investor's rate of return for alternative 2?

c. What will be the investor's rate of return for alternative 3?

Reference no: EM132929427

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