Problem:
Before you wrap up the campaign, you decide to spend a little time sharing information with investors on using derivatives to manage risk and enhance stock portfolio returns.
You decide the best way to illustrate this is via a call option that customers can use on a stock that might have some upside potential. If the stock does not reach the potential, the option minimizes the risk. The stock is LVO Enterprises?a high tech firm that did well during the Internet boom but declined when the boom turned into a bust. If the company's new portal software is adopted by a large number of consumers over the next few months, you believe the stock can go much higher. The 6-month options are priced at US$1, the strike price is 22, and the current price for LVO stock is 20.
Put a slide presentation together with graphs inserted that illustrate what advice you would give the customers on the options if the price of the stock was 19, 20, 24, and 28. Be sure the graphs tell which of these prices would exercise the call option.