Look back at Table 23.2. Suppose that by January 2017, the price of Alphabet could either rise
Question:
a. What would be your percentage return on a January expiration call option with an exercise price of $750 if the stock price rose?
b. What would be your percentage return if the stock price fell?
c. Which is riskier: the stock or the option?
Step by Step Answer:
a The January 2017 calls with an exercise of 750 costs 8180 If ...View the full answer
Fundamentals of Corporate Finance
ISBN: 978-1259722615
9th edition
Authors: Richard Brealey, Stewart Myers, Alan Marcus
Related Video
A call option is a type of financial contract that gives the holder the right, but not the obligation, to buy an underlying asset (such as a stock, commodity, or currency) at a specified price (called the strike price) within a specified period of time. When an investor purchases a call option, they are essentially betting that the price of the underlying asset will rise above the strike price before the option\'s expiration date. If the price of the asset does rise above the strike price, the investor can exercise the option by buying the asset at the strike price and then selling it at the higher market price, thereby earning a profit. Call options are often used as a speculative investment strategy, as they allow investors to potentially profit from the upward movement of an asset without having to actually own the asset itself. They are also commonly used as a hedging tool to protect against potential losses in a portfolio.
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