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The current price of a stock is $94, and three-month European call options with a strike price of $95 currently sell for $4.70. An investor who feels that the price of the stock will increase is trying to decide between buying 100 shares and buying 2,000 call options (20 contracts). Both strategies involve an investment of $9,400. How high does the stock price have to rise for the option strategy to be more profitable?

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Solution Summary

The solution explains how to calculate the expected stock price to make a decision between buying shares or buying call options.

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Let the price rise to $S.
In case of buying the shares, the profit would be (S-94) X 100
In case of option, the profit ...

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