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 $215 and sell at a premium of $20 each. The investor has $9,000 to invest, and is considering 3 alternatives:

Purchase 450 call options.

Purchase 45 shares.

Invest $8,100 in a money market fund returning 6% per year and buy 45 call options with the remaining money.

Assume that the stock price will be $242 per share after 12 months.

What will be the investor's rate of return for alternative 1?

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

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

Answer rating: 100% (QA)

To calculate the investors rate of return for each alternative we need to determine the investment costs and the final value of each investment Lets c... View the full answer