n investor purchases a 1-year call option on a thoroughbred racehorse with an exercise price of $1 million. The price of the option is $50,000. The investor is most likely to exercise his option in one year if the value of the horse at that time Question 10 options: a) exceeds $1,050,000. b) exceeds $1,000,000. c) is less than $1,000,000. d) is less than $950,000

n investor purchases a 1-year call option on a thoroughbred racehorse with an exercise price of $1 million. The price of the option is $50,000. The investor is most likely to exercise his option in one year if the value of the horse at that time Question 10 options: a) exceeds $1,050,000. b) exceeds $1,000,000. c) is less than $1,000,000. d) is less than $950,000

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter20: Financing With Derivatives

Section: Chapter Questions

Problem 2P

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An investor purchased a call option that allows her to purchase 100 shares of Dell Computer common stock for $45 per share any time during the next six months. The price she paid for the option was $2.50 per share, or $250 total, and the current market price of Dell's stock is $42.50. If the price of Dell increases to $50 and the investor decides to exercise it, what will be the gain or loss that results from the option position that was held? Ignore taxes and commissions.a. $500 gainb. $250 lossc. $750 gaind. $250 gaine. None of the above.
You have $50,000 saving and are considering a 30-year investment which is offered in two phases: Phase 1: Investing that $50,000 as a lump sum in an investment in the securities market for 20 years. Your securities broker recommends two alternative options: Option A pays interest rate of 11.87%, compounding daily. Option B pays interest rate of 12%, compounding quarterly. Phase 2: At the end of 20 years, putting the total amount accumulated in the first phase into another investment, which will pay you an equal income at the end of each year for 10 years. Required: a) Identify which option should you choose in Phase 1 by computing the effective annual interest rate (EAR)? b) Calculate the amount of money you would accumulate in Phase 1 after 20 years if you choose Option A? c) If you would like to have exactly $600,000 after 20 years, how much the investment rate of return (compounding annually) should be? d) Assume that after 20 years, you put totally $500,000…
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