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A stock market speculator can choose between (i) buying 1000 shares of
a certain stock for $80 per share, and (ii) buying 10, 000 European-style
call options on the stock with a strike price of $90 for $8 per option.
Which of the following is true? For choice (ii) to give a better result when
the option matures, the share price must be above:
Step by step
Solved in 2 steps
- You strongly believe that the price of Breener Inc. stock will rise substantially from its current level of $137, and you are considering buying shares in the company. You currently have $13,700 to invest. As an alternative to purchasing the stock itself, you are also considering buying call options on Breener stock that expire in three months and have an exercise price of $140. These call options cost $10 each. a. Compare and contrast the size of the potential payoff and the risk involved in each of these alternatives. b. Calculate the three-month rate of return on both strategies assuming that at the option expiration date Breener's stock price has (1) increased to $155 or (2) decreased to $135. c. At what stock price level will the person who sells you the Breener call option break even? Can you determine the maximum loss that the call option seller may suffer, assuming that he does not already own Breener stock?Stock options, gold options and index options are examples of options where the underlying assets are stocks, gold and stock market index, respectively. What is the difference between European and American option? Are European options available exclusively in Europe and American options available exclusively in the United States? You own a call option on Intuit stock with a strike price of RM36. The option will expire in exactly three months’ time. If the stock is trading at RM46 in three months, what will be the payoff of the call? If the stock is trading at RM32 in three months, what will be the payoff of the call? Draw a payoff diagram showing the value of the call at expiration as a function of the stock price at expiration. Suppose that a June put option to sell a share for RM10 costs RM2 and is held until June. Under what circumstances will the seller of the option make a profit? Under what circumstances will the option exercised?An institutional investor holds several European call options on a non-dividend-paying stock with a strike of $55. The current stock price is $65, while the continuously compounded risk-free rate is 2% p.a and volatility is 25%. Assuming that the market follows the assumptions of the Black-Scholes option model: (i) Calculate the price of a one-year call option on the stock. (ii) Calculate the price of a one-year put on the same stock with the same strike price.
- One of the categories of options available to investors and speculators is LEPOs. Assuming 7.00 per cent margin, what would be the percentage return and dollar profit to an investor who purchased one LEPO (for 1000 shares) for a premium of $26 220 and later closed out the position when the LEPO premium was $28 430?The current price of XYZ stock is $50, and two-month European call options with a strike price of $51 currently sell for $10. As a financial analyst at Merrill Lynch, you are considering two trading strategies regarding stocks and options. Strategy A involves buying 100 shares and Strategy B includes buying 500 call options. Both strategies involve an investment of $5,000.a. How much is the profit (loss) for strategy A if the stock closes at $65?(sample answer: $100.25 or -$100.25) b. How much is the profit (loss) for strategy B if the stock closes at $65? (sample answer: $100.25 or -$100.25) c.How high does the stock price have to rise for strategy B to be more profitable (break-even point)? (sample answer: $100.25)You work on a proprietary trading desk of a large investment bank, and you have been asked for a quote on the sale of a call option with a strike price of $53 and one year of expiration. The call option would be written on a stock that does not pay a dividend. From your analysis, you expect that the stock will either increase to $73 or decrease to $38 over the next year. The current price of the underlying stock is $53, and the risk-free interest rate is 5% per annum. What is this fair market value for the call option under these conditions? Do not round intermediate calculations. Round your answer to the nearest cent. $
- An investor tells their broker to short 1,000 shares of a stock that is currently priced at $50. Is the investor betting that the price will go up or down in this scenario? Where do the shares for a short sale come from?Which of the following would offer the best return on investment? Assume that you buy $5,000 in stock in all three cases, and ignore interest and transaction costs in all your calculations. Also assume that decimal number of stocks can be bought so all the amount discussed is invested into the stocks in all three cases. Buy a stock at $90 without margin, and sell it a year later at $105. Buy a stock at $70 with 50% margin (50% loan), and sell it a year later at $85. Buy a stock at $65 with 25% margin (75% loan), and sell it a year later at $80. Alternative offers the best return on the investment.You have been researching a stock that you like, which is currently tradingat $39 per share. You would like to buy the stock if it were a little less expensive—say, $36 per share. You believe that the stock price will go to $59 by year-end and then level off or decline. You decide to place a limit order to buy 100 shares of the stock at $36 and a limit order to sell it at $59. It turns out that you were right about the direction of the stock price, and it goes straight to $64. What is your current position?
- Suppose that the last sale of Company X stock was at a price of $50. Further suppose that an investor wishes to place a market order to purchase 25,000 shares of Company X stock. What is the volume weighted average price that the investor will trade at in each of the market? What if the investor purchase 120,000 shares instead 25,000? Market Depth - Market A vs B Market AMarket B#SharesOffer ($)#SharesOffer ($)30,00050.0010,00050.0040,00050.0210,00050.0110,00050.0570,00050.0320,00050.0680,00050.0430,00050.0760,00050.0510,00050.0940,00050.05A collar is established by buying a share of stock for $50, buying a 6-month put option with exercise price $45, and writing a 6-month call option with exercise price $55. On the basis of the volatility of the stock, you calculate that for a strike price of $45 and expiration of 6 months, N(d1) = .60, whereas for the exercise price of $55, N(d1) = .35.a. What will be the gain or loss on the collar if the stock price increases by $1?b. What happens to the delta of the portfolio if the stock price becomes very large?c. What happens to the delta of the portfolio if the stock price becomes very small?Consider a stock priced at $33 with a standard deviation of 0.3. The risk-free rate is 0.05. There are put and call options available at exercise prices of 35 and a time to expiration of six months. The calls are priced at $2.39 and the puts cost $2.05. There are no dividends on the stock and the options are European. Assume that all transactions consist of 100 shares or one contract (100 options). Suppose the investor constructed a covered call. If the transaction is closed out when the option has three months to go and the stock price is at $39, what is the investor's profit?