Suppose that the current price of a non-dividend paying stock is So = 20 and that you believe that the stock will go up to ST = 30 or down to ST 15 with equal probability. There is also a European call on the stock with strike K 20 priced at Co = 2. = (a) You consider one of the two following investments: 1) All in the stock 2) All in the call Formally show which investment strategy has more risk. (Assume for simplicity that one call entitles you to purchase one stock). (b) Suppose you decide to invest $1 million. What are the profit/losses associated with these two strategies?

Suppose that the current price of a non-dividend paying stock is So = 20 and that you believe that the stock will go up to ST = 30 or down to ST 15 with equal probability. There is also a European call on the stock with strike K 20 priced at Co = 2. = (a) You consider one of the two following investments: 1) All in the stock 2) All in the call Formally show which investment strategy has more risk. (Assume for simplicity that one call entitles you to purchase one stock). (b) Suppose you decide to invest $1 million. What are the profit/losses associated with these two strategies?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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