Asked by La Vida de una Guerrera on Jun 26, 2024
Verified
Janet Lee is considering purchasing shares in DM Designs. The share price is currently $64. Alternatively, Janet can buy an out of the money call option with a striking price of $65, that is currently priced at $2.25. Janet expects the stock price to rise to $68. What is the difference between the stock's return on investment and the option's return on investment?
Call Option
A call option is a financial contract that gives the buyer the right, but not the obligation, to buy an asset at a specified price within a predetermined period.
Stock Price
The present selling or buying price of a company's stock in the market.
- Assess the valuation of stocks using assorted techniques and envisage the earnings from investments in particular scenarios.
Verified Answer
KK
Kaycee KinnardJul 02, 2024
Final Answer :
ROI Option: ($68 - $65 - $2.25) / $2.25 = $0.75 / $2.25 = 33.33%
ROI Stock: ($68 - $64)/ $64 = 6.25%
A difference of 27.08%.
ROI Stock: ($68 - $64)/ $64 = 6.25%
A difference of 27.08%.
Learning Objectives
- Assess the valuation of stocks using assorted techniques and envisage the earnings from investments in particular scenarios.