1) In early 2000, the Dow Jones Industrial Average rose above the 11,000 level. If the Dow were to fall to 7,000, who would gain the most: investors who had bought call options, investors who had bought put options, or inventors who had sold put options ? Who would be hurt the most ?
2) Suppose that you believe the fundamental value of Wal-Grey stock is about to rise from $50 to $100 because of its new management team. You have $20,000 that you can risk in the market, and you can think of four possible ways to profit:
a)use your $20,000 to buy shares of Wal-Grey
b)borrow (at a 6% interest rate) an additional $20,000 on margin to buy a total of $40,000 worth of Wal-Grey stock
c) enter into a futures contract to buy 400 shares of Wal-Grey in one year for $21,200 (you can invest safetly for a year at a 6% interest rate)
d)buy a call option (for every $1000 you spend on call options, you have the right to buy 100 shares of Wal-Grey at the current price of $50 per share.)
Calculate how much you earn or lose by each method if:
(i) Wal-Grey stock rises to $100 per share in one year.