An investor believes that the Cisco stock price is going to increase in the following 12 months from the current stock price of $200. Call options on Cisco stock expiring in 12 months have a strike price of $210 and sell at a premium of $20 each. The investor has $19,000 to invest, and is considering 3 alternatives: Purchase 950 call options. Purchase 95 shares. Invest $17,100 in a money market fund returning 8% per year and buy 95 call options with the remaining money. Assume that the stock price will be $237 per share after 12 months. What will be the investor's rate of return for alternative 2? What will be the investor's rate of return for alternative 3?

Essentials Of Investments
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ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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An investor believes that the Cisco stock price is going to increase in the following 12 months from the current stock price of $200. Call options on Cisco stock expiring in 12 months have a strike price of $210 and sell at a premium of $20 each. The investor has $19,000 to invest, and is considering 3 alternatives: Purchase 950 call options. Purchase 95 shares. Invest $17,100 in a money market fund returning 8% per year and buy 95 call options with the remaining money. Assume that the stock price will be $237 per share after 12 months.

What will be the investor's rate of return for alternative 2?

What will be the investor's rate of return for alternative 3?

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