Question - So far, things have gone well with Dr. Bueller. Before you wrap up your meetings and he begins investing, you decide to spend a little time sharing information with him about using derivatives to manage risk and enhance returns in his stock portfolio.
You decide the best way to illustrate this is via a call option that he 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 AXQ 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 US$22, and the current price for AXQ stock is US$20.
Put together a report of 4-6 pages (body of report) with a table or graph included that illustrates what advice you would give Dr. Bueller on the options if the price of the stock was US$18, US$21, US$24, or US$28 at the end of 6 months.
Assignment Guidelines
- Create a report of 4-6 pages (body of report) for Dr. Bueller that includes the following:
- Your table or graph that contains the stock option data and the profit/loss depending on the hypothetical stock prices of US$18, US$21, US$24, or US$28 at the end of the 6-month period.
- Your recommendations on whether or not to exercise the option based on the four hypothetical stock prices. Explain the reasoning behind your recommendations.
Answer the following questions:
- What happens if the stock price hits US$23? US$23.01?
- What purpose could adding a technology company into a stock portfolio serve?
- Please be sure that your report adheres to the general format above.
Your submitted assignment must include the following: A report of 4-6 pages (body of report) that includes a title page, your stock option information table or graph, your stock option recommendations, and your answers to the questions listed in the Assignment Guidelines. Be sure to include a complete explanation of the rationale supporting your recommendations.