You spend many sleepless nights building cash flow models of Facebook Inc. (FB) and are convinced they are undervalued. The current spot price of FB is $204/share. You predict that in 6 months they will reach $240/share. Assume a 2% interest rate per annum. a) You buy a January 2020 call option (t=6 months) for $5.20/share with a strike price of $230/share. Draw a payoff and profit diagram of this position. b) Under what circumstances will you make money?

You spend many sleepless nights building cash flow models of Facebook Inc. (FB) and are convinced they are undervalued. The current spot price of FB is $204/share. You predict that in 6 months they will reach $240/share. Assume a 2% interest rate per annum. a) You buy a January 2020 call option (t=6 months) for $5.20/share with a strike price of $230/share. Draw a payoff and profit diagram of this position. b) Under what circumstances will you make money?

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

See similar textbooks

Similar questions

2. Suppose you purchase 500 shares of stock at $48 per share with an initial cash investment of $8,000. If your broker requires a 30% maintenance margin, at what share price will you be subject to a margin call? Suppose the call money rate is 5% and you are charged with a 1.5% premium over this rate. Calculate your return on investment if the share price is $56 per share in 5 months. What is the effective annual return rate if you sell the shares at $56 per share in 5 months?
Suppose you are thinking of purchasing the stock of Moore Oil, Inc. and you expect it to pay a $2 dividend in one year and you believe that you can sell the stock for $14 at that time. If you require a return of 20% on investments of this risk, what is the maximum you would be willing to pay?
As a finance manager in a company, you considering purchasing a call option on the stock of Crude Oil Company. Currently Crude Oil Company stock trades for $700 per share, and you predict that its price will be either $500 or $1000 in one year. The call option would enable you to buy a share of Crude Oil Company stock in one year for $600. What is this option worth if the risk-free rate is 5%?
Suppose you buy 700 shares of XYZ currently trading at $63 per share with a loan from your broker. Your initial margin requirement is 50%. The maintenance margin is 30%. Suppose the price suddenly (and instantaneously) jumps down to $42 per share, triggering a margin call. As a result of the margin call, you are required to get your margin back up to 50%, by selling off shares to pay down your margin loan (you could use cash, but you do not want to throw good money after bad). How many shares to you need to sell (using the proceeds to pay down your margin loan) to get your margin back up to 50%? Assume that you can sell shares at $42 per share and assume the interest rate on your margin loan is 0%. Ignore taxes and transaction costs. Important Hint: If you get a fractional number of shares as your answer, round up.
You are bullish on XYZ stock. The current market price is $100 per share, and you have $10,000 of your own to invest. You borrow an additional $10,000 from your broker at an interest rate of 8% per year and invest $20,000 in the stock. WHAT IS THE margin call if the maintenance margin is 30%? Assume the price IS $115 one year LATER.
S Suppose you have $30,000 to invest. You're considering Miller-Moore Equine Enterprises (MMEE), which is currently selling for $50 per share. You also notice that a call option with a $50 strike price and six months to maturity is available. The premium is $4. MMEE pays no dividends. What is your annualized return from these two investments if, in six months, MMEE is selling for $56 per share? What about $46 per share?- Note: A negative value should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. $56 per share $46 per share Annualized Return Option Stock % % %
Suppose you have $48,000 to invest. You're considering Miller-Moore Equine Enterprises (MMEE), which is currently selling for $80 per share. You also notice that a call option with a $80 strike price and six months to maturity is available. The premium is $4. MMEE pays no dividends. What is your annualized return from these two investments if, in six months, MMEE is selling for $88 per share? What about $76 per share?- Note: A negative value should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. $88 per share $76 per share X Answer is not complete. Annualized Return Option Stock 21.00 % -9.75 % % %
Eastern Bank went public in 2020 and you are thinking about buying it. The stock (EBC) stock is currently selling for $797.29. You are thinking about buying it and you hope to sell it in 6 years. If your required return on investments of this risk is 16.1%, what must you sell it for? Answer:
You are bullish on GCB stock. The current market price is GHS5.00 per share, and you have GHS5,000 of your own to invest. You borrow an additional GHS5,000 from your broker at an interest rate of 12% per year and invest the GHS10,000 in the stock. a.What will be your rate of return if the price of GCB stock goes up by 20% during the next year? b.How far does the stock of GCB stock have to fall for you to get a margin call if the maintenance margin is 30%.
Suppose you have $42,000 to invest. You’re considering Miller-Moore Equine Enterprises (MMEE), which is currently selling for $60 per share. You also notice that a call option with a $60 strike price and six months to maturity is available. The premium is $3. MMEE pays no dividends. What is your annualized return from these two investments if, in six months, MMEE is selling for $67 per share? What about $56 per share?
You would like to speculate on a rise in the price of "Microsoft". The current stock price is $ 100, and a three-months call with a strike price of $ 102 costs $5. You have $10,000 to invest. a. Identify two alternative investment strategies in “Microsoft “with the potential gains and losses using the following two scenarios: • If the spot price went up to $ 110. • If the spot price went down to $ 90. b. Explain the results
You would like to speculate on a rise in the price of "Microsoft". The current stock price is $ 100, and a three-months call with a strike price of $ 102 costs $5. You have $10,000 to invest. Identify two alternative investment strategies in “Microsoft “with the potential gains and losses using the following two scenarios: If the spot price went up to $ 110. If the spot price went down to $ 90.

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

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

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

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

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS