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Wal-Mart stock

Suppose you think Wal-Mart stock is going to appreciate substantially in value in the next year. Say the stock's current price, S0, is $100, and the call option expiring in one year has an exercise price, X, of $100 and is selling at a price, C, of $10. With $10,000 to invest, you are considering three alternatives:
a. Invest all $10,000 in the stock, buying 100 shares.
b. Invest all $10,000 in 1,000 options (10 contracts).
c. Buy 100 options (one contract) for $1,000 and invest the remaining $9,000 in a money market fund paying 4% interest annually.
What is your rate of return for each alternative for four stock prices one year from now?
Summarize your results in a table that shows the rate of return on investment for all three alternatives.

Solution Preview

Since there is no new stock price given, I assume a new stock price where you can take a look at the calculation.

Assume that Wal-Mart stock price one year from now is $150.

a. Invest all $10,000 in the stock, buying 100 shares.

1-year ...

Solution Summary

This solution is comprised of a detailed explanation to answer what is the rate of return for each alternative for four stock prices one year from now and summarize the results in a table that shows the rate of return on investment for all three alternatives.

$2.19