5.You would like to speculate on a rise in the price of a certain stock. The current stock price is $30and a 3-month call with a strike price of $32 costs $3. You have $6000 to invest. Identify twoalternative investment strategies, one in the stock and the other in an option on the stock (Tell meexactly what you would do in each strategy and calculate the total profit for different stock prices.How many shares/options you would buy/sell?)Strategy 2 (option):Stock price (ST) in the$20$25$30$32$35$40$45marketOption value (Pay off)PremiumProfit from strategy 2a) Would you buy or sell call options?b) How many call options would you buy or sell?c) How will you make money? 5.You would like to speculate on a rise in the price of a certain stock. The current stock price is $30and a 3-month call with a strike price of $32 costs $3. You have $6000 to invest. Identify twoalternative investment strategies, one in the stock and the other in an option on the stock (Tell meexactly what you would do in each strategy and calculate the total profit for different stock prices.How many shares/options you would buy/sell?)Strategy 1 (stock):Stock price (ST) in the marketProfit from strategy 1$25$30$32$35$40$45a) Would you buy or sell stocks?b) How many stocks would you buy or sell?c) How will you make money?%24

Speculation is a strategy of trading stock in which the investor buys or sells the stocks by…

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You would like to speculate on a rise in the price of a certain stock. The current stOCK

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 3P

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Concept explainers

Portfolio Management

Portfolio management is the process by which an investor decides that how the person will invest in a variety of assets in order to get a desired return in the future. A portfolio means a pool of assets that includes securities, bonds, and other investment instruments which helps in risk minimization of the money that has been invested. In other words, it can be said that a portfolio means a combination of assets in which an investor decides to invest their money in order to get a lump sum return in the future or even a series of cash flow that the person is expecting at the end of their job life.

Question

5.You would like to speculate on a rise in the price of a certain stock. The current stock price is $30
and a 3-month call with a strike price of $32 costs $3. You have $6000 to invest. Identify two
alternative investment strategies, one in the stock and the other in an option on the stock (Tell me
exactly what you would do in each strategy and calculate the total profit for different stock prices.
How many shares/options you would buy/sell?)
Strategy 2 (option):
Stock price (ST) in the
$20
$25
$30
$32
$35
$40
$45
market
Option value (Pay off)
Premium
Profit from strategy 2
a) Would you buy or sell call options?
b) How many call options would you buy or sell?
c) How will you make money?

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