# 72 ) MGT 2100 – Final Review-

72 ) MGT 2100 – Final Review- You are expecting the currentstock price to increase in the near future. The stock currentlytrades for \$23 per SH. A call option with a price (strike price) of\$25 can be purchased for \$4.60 per share at this particular time.You have \$4,600 to invest.

a) What are your two alternative investment strategies for the\$4,600 (one in the stock and the other in call options)? Assume allof this money must be invested in either stock or options for thisquestion.

b) What will your profit (\$) for the stock strategy be if theprice of the stock on the expiration date is \$31 per share?

c) What will your profit (\$) to the option strategy be if theprice of the stock on the expiration date is \$31 per share?

d) What underlying asset price do you break even on the optionstrategy?

Here,

Current stock price= \$23

Call option strike price= \$25

a) The two investment strategies for the \$4600 are

i) Buy the stock at\$23 per share

ii) Buy call optionat \$4.60 per call option

b) Profit for stock strategy

Amount of share bought =Amount to beinvested/Purchase price

= \$4,600/23= 200 shares

Profit on stock strategy

=( Price on expiration-Purchase price)*No of shares

=(31-23)*200

=\$1,600

c) Profit on option strategy

=(Price of share on expiration-strike price-premium paid)*Number of         options

=(31-25-4.60)*(4600/4.60)

=\$1400

d) The underlying asset breakeven price= strike price+ premiumpaid

=\$25+\$4.60

=\$29.60

Please feel free to ask if you have any query in thecomment section.

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