Question

Suppose you think Apple stock is going to appreciate substantially in value in the next year. Say the stock's current price, Sa, is $125, and a call option expiring in one year has an exercise price, X, of $125 and is selling at a price, C, of $13. With $39,000 to invest, you are considering three alternatives. a. Invest all $39,000 in the stock, buying 312 shares. b. Invest all $39,000 in 3,000 options (30 contracts) c Buy 100 options (one contract) for $1.300, and invest the remaining $37,700 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 in 6 months? (Leave no cells blank- be certain to enter "o" wherever required. Negative amounts should be indicated by a minus sign. Round the "Percentage return of your portfolio (Bills +100 options)" answers to 2 decimal places.) The total value of your portfolio in six months for each of the following stock prices is Price of Stock 6 Months from Now 125 S 105 S Stock Price All stocks (312 shares) All options (3,000 options) Bills 100 options 135 145 The percentage return of your portfolio in six months for each of the following stock prices is: Price of Stock 6 Months from Now 135 145 Stock Price All stocks (312 shares) All options (3,000 options) Bills100 options 105 125

Answer 1

solution: Price of Stock 6 month from Now 145 45240 60000 41208 Stock Price All stocks (312 shares) All options (3,000 Options) Bills 100 option:s Note No 105125135 1 32760 39000 42120 0 30000 3 39208 39208 40208 0 Price of Stock 6 month from Now Stock Price All stocks (312 shares) All options (3,000 Options) Bills 100 option:s Note No 105125135 41-16% 0% 8% 5-100%-100%-23% 6 0.53% 0.53% 3.10% 145 16% 54% 5.66%

Working: Note 1:All stocks (312 shares) Stock Price x No. Of stocks Investment value Price of Stock 6 month from Now 105 125 135 145 312 45240 312 312312 32760 39000 42120 Note 2: All options (3,000 options) call option strike price call Premium No of options 125 13 3000 Price of Stock 6 month from Now Stock Price Option value at expiration xNo. Of stock Investment value 135 10 30003000 3000 0 30000 105 125 145 20 3000 60000 0 0 0 Note 3:Bills +100 options call option strike price Premium paid No of options Investment in money market fund37700 Interest rate over 6 month 125 13 100 4% Price of Stock 6 month from Now Stock Price Option value at expiration xNo. Of stock Total Value of option Add: Value of bills (377001.04) Total investment value 135 10 100 100 01000 39208 39208 39208 39208 39208 40208 105 0 100 0 125 145 20 100 2000 39208 41208 0

Note 4:All stocks (312 shares) Stock Price Investment value Less: Initial investment value Profit/(loss) / Initial investment value Rate of return Price of Stock 6 month from Now 135 32760 39000 42120 39000-39000 -39000 0 3120 39000 39000 39000 8% 105 125 145 45240 39000 6240 39000 16% -6240 -16% 0% Note 5: All options (3,000 options) Price of Stock 6 month from Now Stock Price Total investment value Less: Initial investment value Profit/(loss) / Initial investment value Rate of return 135 0 30000 39000-39000 -39000 39000-39000 -9000 39000 39000 39000 -100%-100% -23% 105 125 145 60000 39000 21000 39000 54% 0 Note 6: Bills 1300 options Stock Price Total investment value Less: Initial investment value Profit/(loss) / Initial investment value Rate of return Price of Stock 6 month from Now 110 3920839208 40208 39000-39000 -39000 208208 1208 39000 39000 39000 0.53% 0.53% 3.10% 80 100 120 41208 39000 2208 39000 5.66%