Question 1
Suppose you think of ABC Co. is going to appreciate substantially in value in the next year. Say the stock's current price is $45, and the call option expiring in one year has an exercise price of $45 and is selling at a price of $ 4.5. With 59,000 to invest, you are considering three alternatives.
a. Invest all 59,000 in the stock, buying 200 shares.
b. Invest all 59,000 in 2000 options.
c. Buy 250 options for $1,125 and invest the remaining $7,835 in T-bills paying 5% interest annually.
What is your payoff for each alternative when the stock price is $50 one year from now? Summarize your results in the table below.
Price of stock 1 year from now 50
a. All stocks
b. all options
c. T- bills+ 100 options
Question 2
The stock price of ABC Inc. is currently $100. The stock price from now will be either $140 or $90 with equal probabilities. The interests rates at wih=ch investors can borrow is 10%.
Using the binomial model, the value of a call option with an exercise price of $130 and an expiration date one year from now should be worth _today?