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solution

Suppose you think FedEx stock is going to appreciate substantially in value in the next 6 months. Say the stock’s current price, S0, is $75, and the call option expiring in 6 months has an exercise price, X, of $75 and is selling at a price, C, of $10. With $15,000 to invest, you are considering three alternatives.

a.

Invest all $15,000 in the stock, buying 200 shares.

b.

Invest all $15,000 in 1,500 options (15 contracts).

c.

Buy 100 options (one contract) for $1,000, and invest the remaining $14,000 in a money market fund paying 4% in interest over 6 months (8% per year).

What is your rate of return for each alternative for the following four stock prices 6 months from now? (Leave no cells blank – be certain to enter “0” wherever required. Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places. Omit the “$” and “%” signs in your response.)

Price of Stock 6 Months from now

Stock Price

$ 55

$ 75

$ 85

$ 95

All Stocks (200 Shares)

$

$

$

$

All options (1,500 options)

$

$

$

$

Bills + 100 options

$

$

$

$

The percentage return of your portfolio in six months for each of the following stock prices is:

Price of Stock 6 Months from Now

Stock Price

$ 55

$ 75

$ 85

$ 95

All Stocks (200 Shares)

%

%

%

%

All options (1,500 options)

%

%

%

%

Bills + 100 options

%

%

%

%

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