Suppose that you believe the fundamental value of Wal-Grey stock is about to rise from $50 to $100 because of its new management team. You have $20,000 that you can risk in the market, and you can think of four possible ways to profit: 

(a) use your $20,000 to buy shares of Wal-Grey; 

(b) borrow (at a 6% interest rate) an additional $20,000 on margin to buy a total of $40,000 worth of Wal-Grey stock; 

(c) enter into a futures contract to buy 400 shares of Wal-Grey in one year for $21,200 (you can invest safely for a year at a 6% interest rate); 

(d) buy a call option (for every $1000 you spend on call options, you have the right to buy 100 shares of Wal- Grey at the current price of $50 per share). 

Calculate how much you earn or lose by each method if: 

(i) Wal-Grey stock rises to $100 per share in one year.

Answer rating: 100% (QA)

If WalGrey stock rises to 100 per share in one year here is how much you would earn or lose by each ... View the full answer