Call option managing risk
So far, things have gone well with Dr. Washington. Before
you wrap up your meetings and he begins investing, you decide to spend a little
time sharing information with him about using derivatives to manage risk and
enhance returns in his stock portfolio.
You decide the best way to illustrate this is via a call
option that he can use on a stock that might have some upside potential. If the
stock does not reach the potential, the option minimizes the risk. The stock is
AXQ Enterprises—a high-tech firm that did well during the Internet boom but
declined when the boom turned into a bust.
If the company’s new portal software is adopted by a large
number of consumers over the next few months, you believe the stock can go much
higher. The 6-month options are priced at US$1, the strike price is US$22, and
the current price for AXQ stock is US$20.
Put together a PowerPoint presentation with a table or graph
included that illustrates what advice you would give Dr. Washington on the
options if the price of the stock was US$18, US$21, US$24, or US$28 at the end
of 6 months.
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