Answer:
the rate of return for each alternative if one year later the stock price is $120 is 100% and 20%
Explanation:
Price of buying call option = 10*1000 = 10000
After 1 year the person can reverse the trade and get profit without having to buy the stock.
Hence profit = 120-100 = 20
Minus call price = 10
Profit per each share = 10
On 1000 shares = 10,000
Hence profit = 10,000/10,000 = 100%
In case we buy stock:
Price of stock = 100*1000 = 100,000
Profit on one stock = 120-100 = 20
On 1000 stock = 20,000
Profit = 20,000/100,000 = 20%
Therefore,the rate of return for each alternative if one year later the stock price is $120 is 100% and 20%
