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The current price of a stock is $100, and three-month American call options with a strike price of $110 currently sell for $5.00 An investor who feels that the price of the stock will increase is trying to decide between buying 100 shares and buying 2,000 call options. Both strategies involve an initial investment of $10,000. We want to compare both strategies by analyzing possible outcomes in the future.

a) What strategy would be more profitable if the price of the stock never reaches $105?'

b) What strategy would be more profitable if the price of the stock reaches $150? Compare the values of the two strategies at the moment that the stock reaches $150.

Financial Management, Finance

  • Category:- Financial Management
  • Reference No.:- M92304402

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