Today's price of the Tesla, Inc. stock is So = $812. An investor who feels that the price of the Tesla stock will increase within the next 3 months is trying to decide between buying today (i) one share, or (ii) five 3-month European call options with strike price K to buy one share in T = 3 months at price K. $850 which are currently selling for $100. Each call option gives the right (a) Provide the profit and loss of both strategies in T = prevailing Tesla stock price ST. How high does Tesla's stock price ST have to rise for strategy (i) to be profitable at time T? How high does Tesla's stock price ST have to rise for the call option strategy (ii) to be profitable at time T? Sketch the graph of both 3 months as a function of the then functions and add suitable annotations. (b) How high does Tesla's stock price ST have to rise for the call option strategy (ii) to be more profitable than strategy (i) at time T? (c) Suppose Tesla's stock price in three months will be ST = $1,200 or ST = $800, respec- tively. What is the corresponding P&L of both strategies? (d) Very briefly discuss the comparison of both strategies (advantages and disadvantages).

Today's price of the Tesla, Inc. stock is So = $812. An investor who feels that the price of the Tesla stock will increase within the next 3 months is trying to decide between buying today (i) one share, or (ii) five 3-month European call options with strike price K to buy one share in T = 3 months at price K. $850 which are currently selling for $100. Each call option gives the right (a) Provide the profit and loss of both strategies in T = prevailing Tesla stock price ST. How high does Tesla's stock price ST have to rise for strategy (i) to be profitable at time T? How high does Tesla's stock price ST have to rise for the call option strategy (ii) to be profitable at time T? Sketch the graph of both 3 months as a function of the then functions and add suitable annotations. (b) How high does Tesla's stock price ST have to rise for the call option strategy (ii) to be more profitable than strategy (i) at time T? (c) Suppose Tesla's stock price in three months will be ST = $1,200 or ST = $800, respec- tively. What is the corresponding P&L of both strategies? (d) Very briefly discuss the comparison of both strategies (advantages and disadvantages).

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter7: Common Stock: Characteristics, Valuation, And Issuance

Section: Chapter Questions

Problem 23P

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