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?
Answer:
Here,
Current stock price= $23
Call option strike price= $25
Call premium = $4.60
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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