Exhibit 20.4
Use the Information Below for the Following Problem(S)
Rick Thompson is considering the following alternatives for investing in Davis Industries which is now selling for $44 per share:
(1) Buy 500 shares, and
(2) Buy six month call options with mexercise price of 45 for $\$ 3.25$ premium
-Refer to Exhibit 20.4.Assuming no commissions or taxes what is the annualized percentage gain if the stock reaches $50 in four months and a call was purchased?
A) 161.54% gain
B) 53.85% gain
C) 161.54% loss
D) 11.11% gain
E) 53.85% loss

Question

Exhibit 20.4
Use the Information Below for the Following Problem(S)
Rick Thompson is considering the following alternatives for investing in Davis Industries which is now selling for $44 per share:
 (1) Buy 500 shares, and
(2) Buy six month call options with mexercise price of 45 for $\$ 3.25$ premium
-Refer to Exhibit 20.4.Assuming no commissions or taxes what is the annualized percentage gain if the stock reaches $50 in four months and a call was purchased?
A) 161.54% gain
B) 53.85% gain
C) 161.54% loss
D) 11.11% gain
E) 53.85% loss

Quizplus · Accepted Answer

[(50 - 45 - 3.25)¸ 3.25] × 3 = 161.54% gain

Exhibit 20 $3.25\$ 3.25$3.25 Premium -Refer to Exhibit 20

Exhibit 20 $\$ 3.25$ Premium
-Refer to Exhibit 20