DSM080: Financial Markets, Assignment, UOL, Singapore: The share price of a certain stock today is $42.50, and five-month European style call options with a strike price of $45 currently sell for $4.25.

Question 3

The share price of a certain stock today is $42.50, and five-month European style call options with a strike price of $45 currently sell for $4.25. A client who feels that the share price is going up is trying to decide between buying 100 shares of the stock or buying 1,000 call options. Both strategies involve an initial investment of $4,250.

(a) What happens to each of these investments if the share price remains at
$42.50 after five months?

(b) What happens if the share price rises from $42.50 to $55 over the five month period?

(c) How high does the share price have to rise for the option strategy to be the
more profitable of the two alternatives