You can buy XZ Company stock at $30 a share, or $3,000 for 100 shares. You can acquire a $33 3-month call for $400. Thus, you could invest $2,600 cash and have the opportunity to buy 100 shares at $33 per share. Assume, however, that you decide to invest your $2,600 in a 3-month CD earning 14 percent interest. The CD will return $91 (14% × $2,600 × 3/12).
(a) If the YZ Company stock goes to $16, what is the option worth.
(b) If the stock goes to $43, would there be a gain or loss?