Suppose that you believe the fundamental value of Wal-Grey stock is about to rise from $50 to $100 because of its new management team. You have $20,000 that you can risk in the market, where the market interest rate is 6%. You can think of four possible ways to profit:
a. use your $20,000 to buy shares of Wal-Grey;
b. borrow (a a 6% interest rate) an additional $20,000 on margin to buy a total of $40,000 worth of Wal-Grey stock;
c. enter into a futures contract to buy 400 shares of Wal-Grey in one year for $21,200 (you can invest safely for a year at a 6% interest rate).
Calculate how much you earn or lose buy each method if
(i) Wal-Grey stock rises to $100 per share in one year.
(ii) Wal-Grey stock stays at $50.