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?



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



c) Profit on option strategy

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



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



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

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