Suppose you think Apple stock is going to appreciate substantially in value in t

Question

Suppose you think Apple stock is going to appreciate substantially in value in the next year. Say the stock’s current price, S0, is $100, and the call option expiring in one year has an exercise price, X, of $100 and is selling at a price, C, of $10. With $10,000 to invest, you are considering three alternatives:

a. Invest all $10,000 in the stock, buying 100 shares.

b. Invest all $10,000 in 1,000 options (10 contracts).

c. Buy 100 options (one contract) for $1,000 and invest the remaining $9,000 in a money market fund paying 4% interest annually.

a. Calculate the value of the investment for stock price one year from now? (Leave no cells blank - be certain to enter "0" wherever required.)

The Prices are $80, $100, $110, $120

All stocks(100 shares)

All Options (1000 Shares)

Bills + 100 options

b. Calculate the rate of return on investment for stock price one year from now? (Leave no cells blank - be certain to enter "0" wherever required. Negative values should be indicated by a minus sign. Round your answers to 1 decimal place.)

The Prices are $80, $100, $110, $120

All stocks(100 shares)

All Options (1000 Shares)

Bills + 100 options

Explanation / Answer

a) Price of stock one year from now

80 100 110 120

All stocks (100 shares) $8,000 $10,000 $11,000 $12,000

(100 X 80) (100 X 100) (100 X 110) (100 X 120)

All options (1,000 shares) $0 $0 $10,000 $20,000

Bills + 100 options $9,360 $9,360 $10,360 $11,360

(9000 X 104%) (1000 + 9000 X 104%)

b) Percentage of Stock 1 Year from Now

80 100 110 120

All stocks (100 shares) -20% 0% 10% 20%

(8000 -1000 /10000)

All options (1,000 shares) -100% -100% 0% 100%

Bills + 100 options -6.4% -6.4% 3.6% 13.6%

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