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.

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.

Essentials of Business Analytics (MindTap Course List)

2nd Edition

ISBN:9781305627734

Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson

Publisher:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson

Chapter15: Decision Analysis

Section: Chapter Questions

Problem 19P: A firm has three investment alternatives. Payoffs are in thousands of dollars. a. Using the expected...

See similar textbooks

Related questions

Q: You are considering investing in a start up company. The founder asked you for $210,000 today and…

A: NPV is also known as Net Present Value.. It is a capital budgeting technique which helps in decision…

Q: You purchase 500 shares of Compucon for $120 per share using a margin account. This transaction…

A: Margin call price can be found by using the following formula:

Q: You are considering investing in a start up company. The founder asked you for $290,000 today and…

A: Net present value and Internal rate of return are capital budgeting techniques used to evaluate…

Q: You are considering investing in a start up company. The founder asked you for $200,000 today and…

A: The NPV of the project refers to the measure of the profitability of the project that is calculated…

Q: You strongly believe that the price of Breener Inc. stock will rise substantially from its current…

A: Current, stock price, S0 = $ 137Amount to invest, A = $ 13,700Strike price on call option, K = $…

Q: You have $10,000 and you decide to borrow an additional $10,000 from your broker (the maximum…

A: Equity value = $10,000 Borrowed value = $10,000 ---------------------------------------------------…

Q: Straddle involves buying a European call and put with the same strike price and expiration date. A…

A: A straddle is an options trading strategy involving the simultaneous purchase of both a call option…

Q: $5000 to invest for 1 year

A: Fund A has a 4% annual return.To calculate the return, use the formula: Return = Principal ×…

Q: A company has the opportunity to make one of two possible investments. Each investment costs R100…

A: Range of outcomes will be calculated by multiplying Expected Return with the probability and adding…

Q: An investment firm is considering two alternative investments, A and B, under two possible future…

A: Given information : Two alternative investments with economic conditions good and poor and their…

Q: You happen to be checking the newspaper and notice an arbitrage opportunity. The current stock price…

A: The put-call parity theorem explains a relationship between the price of put and call options of the…

Q: Sked you for $200,000 today and you expect to get years. Given the of the livestment opportunity,…

A: The NPV of the project refers to the measure of the profitability of the project that is calculated…

Q: An investor is considering purchasing Apple’s stock for $150 per share. The investor is optimistic…

A: Strike price = $150 Option premium = $3.95 Breakeven value = ? Breakeven value on the call option…

Q: You are considering an investment with the following characteristics. The investment will cost you…

A: NPV is also known as Net Present Value.. It is a capital budgeting technique which helps in decision…

Q: You would like to speculate on a rise in the price of a certain stock. The current stOCK

A: Speculation is a strategy of trading stock in which the investor buys or sells the stocks by…

Q: 5.You would like to speculate on a rise in the price of a certain stock. The current stock price is…

A: " Since you posted multiple sup-parts questions, we will answer the first three sub-parts for you as…

Q: Suppose you are the financial manager of a company, and there are three potential projects for…

A: Part (a-1): Calculation of expected return of the market portfolio and beta: Excel spreadsheet:

Q: 5.You would like to speculate on a rise in the price of a certain stock. The current stock price is…

A: Option strategy: A) Would you buy/Sell the call option?

Q: Suppose that you plan to invest in stock A, because you believe that stock A will appreciate in the…

A: We have 3 strategies A: Invest entirely in stock A. B: Invest entirely in call option on stock A. C:…

Q: Suppose an investor sells 100 stocks by short selling for 6 months, the stock price is 30 yuan, and…

A: Number of Stocks =100 Short sell t =6 months r =3% Stock spot Price = 30yuan Forward Rate = Spot…

Q: As a finance manager in a company, you considering purchasing a call option on the stock of Crude…

A: An option is a financial instrument whose value is calculated on the basis of underlying securities.…

Question

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.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 2 steps with 2 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

Which of the following would offer the best return on investment? Assume that you buy $5,000 in stock in all three cases, and ignore interest and transaction costs in all your calculations. Also assume that decimal number of stocks can be bought so all the amount discussed is invested into the stocks in all three cases. Buy a stock at $90 without margin, and sell it a year later at $105. Buy a stock at $70 with 50% margin (50% loan), and sell it a year later at $85. Buy a stock at $65 with 25% margin (75% loan), and sell it a year later at $80. Alternative offers the best return on the investment.
You strongly believe that the price of Breener Inc. stock will rise substantially from its current level of $137, and you are considering buying shares in the company. You currently have $13,700 to invest. As an alternative to purchasing the stock itself, you are also considering buying call options on Breener stock that expire in three months and have an exercise price of $140. These call options cost $10 each. a. Compare and contrast the size of the potential payoff and the risk involved in each of these alternatives. b. Calculate the three-month rate of return on both strategies assuming that at the option expiration date Breener's stock price has (1) increased to $155 or (2) decreased to $135. c. At what stock price level will the person who sells you the Breener call option break even? Can you determine the maximum loss that the call option seller may suffer, assuming that he does not already own Breener stock?
You happen to be checking the newspaper and notice an arbitrage opportunity. The current stock price of Intrawest is $25 per share and the one-year risk-free interest rate is 3%. A one-year put on Intrawest with a strike price of $23 sells for $3.15, while the identical call sells for $6.13. Explain what you must do to exploit this arbitrage opportunity. (Select the best choice below.) OA. The strategy would be to sell the call option, buy the put and the stock, and borrow $22.33. The net benefit is $0.31. OB. The strategy would be to sell the call option, buy the put and the stock, and borrow $23. The net benefit is $0.31. OC. The strategy would be to sell the call option, buy the put and the stock, and borrow $22.33. The net benefit is $0.98. OD. The strategy would be to buy the call option, sell the put and the stock, and borrow $22.33. The net benefit is $0.31.
How is AIC currently valued in the stock market? (under, over, fairly) Your firm's client makes her investment decisions based on research report and requires 30% margin safety. What would be her investment decision if AIC price falls to $40?
A company has the opportunity to make one of two possible investments. Each investment costs R100 000. Financial analysts predict the following possible outcomes for the two investments: Outcome Probability Investment Charlie Investment Beta Expected Return Expected Return Pessimistic. 50%. 2%. 6% Most likely. 30%. 10%. 8% Optimistic. 20%. 18%. 11% Calculate the range of returns for the two investments. 1. Range of outcomes = Charlie = 10%; Beta = 8% 2. Range of outcomes = Charlie = 8%; Beta = 2% 3. Range of outcomes = Charlie = 16%; Beta = 5% 4. Rangeofoutcomes=Charlie=12%;Beta=19%
A4)
An investor is considering purchasing Apple’s stock for $150 per share. The investor is optimistic (bullish) that the price will increase to $155 by August 19 (appx one month) and decides to buy (long) a call option for $3.95 per share. What is the breakeven value of this potential investment?
Suppose an investor sells 100 stocks by short selling for 6 months, the stock price is 30 yuan, and the annual interest rate of 6 months is fixed at 3%. How can I use forward contracts to avoid risks? What is the execution price? Please analyze if the stock price rises to 35 yuan or falls to 25 yuan after 6 months of hedging, what are the losses of this investor?
You are bearish on Telecom and decide to sell short 100 shares at the current market price of $49 per share. a. How much in cash or securities must you put into your brokerage account if the broker's initial margin requirement is 50% of the value of the short position? Initial margin b. How high can the price of the stock go before you get a margin call if the maintenance margin is 30% of the value of the short position? (Round your answer to 2 decimal places.) Stock price reaches
5.You would like to speculate on a rise in the price of a certain stock. The current stock price is $30 and a 3-month call with a strike price of $32 costs $3. You have $6000 to invest. Identify two alternative investment strategies, one in the stock and the other in an option on the stock (Tell me exactly what you would do in each strategy and calculate the total profit for different stock prices. How many shares/options you would buy/sell?) Strategy 2 (option): Stock price (ST) in the $20 $25 $30 $32 $35 $40 $45 market Option value (Pay off) Premium Profit from strategy 2 a) Would you buy or sell call options? b) How many call options would you buy or sell? c) How will you make money?
You are offered a four-year investment opportunity costing $450,000 today. The investment will pay $115,500 in the first year, $136,500 in the second year, $159,250 in the third year, and $180,250 in the fourth year,. Investments of comparable risk require a 14% rate of return in the financial market. Should you accept the investment opportunity and why? OA. No, because the investment's net present value is negative. OB. No, because the investment's net present value is zero. OC. Yes, because the investment's cash payments represent a total return of 31% on the $450,000 investment. OD. Yes, those cash payments look good to me because they add up to $591,500 which is more than the $450,000 investment. OE. Yes, because the investment's net present value is greater than zero.
MCS Corporation is considering two possible investments and needs your help in determining which will be the better financial option. Perform the necessary calculations using Microsoft Excel so that maximum precision can be obtained. (Unless indicated otherwise, enter your answers rounded to the nearest whole dollar/input code: 0). Investment Option "North" This potential investment is a little more risky and longer term, so it has a minimum rate of return of 17.60%. This investment would require an initial outlay of cash to purchase a piece of equipment for $131,000, and at the end of the 8- year life of this investment is expected to have a salvage value of $39,300. For each year of this investment, net annual cash inflows are expected to be $29,500. 1. How much is the present value of the purchase of equipment? 2. How much is the present value of the salvage value? 3. How much is the present value of the annual cash inflows? 4. How much is the Net Present Value? 5. What is the value…