Question
Garthurst in his capacity as an analyst at Third Global Investments has been looking at a listed company called Wireless Ltd. Garthurst believes Wireless Ltd's
Garthurst in his capacity as an analyst at Third Global Investments has been looking at a listed company called Wireless Ltd. Garthurst believes Wireless Ltd's share price will rise over next 2 months. The issue is that Global Investments does not have the cash flow required to buy the share now. The current share price of Wireless Ltd is $35.00. There are call options listed on the exchange with an expiry of 2 months, an exercise price of $40.00 and a premium of $2.25.
(a) In order for Third Global Investments to benefit from Garthurst's assessment of Wireless Ltd, should a long or a short position be taken in the call option? What will be the initial cash flow from this position?
(b) Calculate the breakeven point, and the profit/loss when the market price is $45 as well as $35.
(c) Is there a way Third Global Investments could have profited from an expected price increase using put options?
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Step: 1
a In order for Third Global Investments to benefit from Garthursts assessment of Wireless Ltd a long position should be taken in the call option When ...Get Instant Access to Expert-Tailored Solutions
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