Thursday, October 17, 2019

Transaction costs and taxes

The price of ABC stock
is currently $42 per share, but in six months you expect it to rise to
$50. ABC does not pay a dividend. You buy a six-month call on ABC, with a
strike price of $45. The option cost $200. What holding period return
do you expect on this call? Ignore transaction costs and taxes. PLEASE
SHOW WORK.

150%

200%

250%

300%
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