So far, things have gone well with Dr. Bueller. 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 report of 4 (body of report) with a table or graph included that illustrates what advice you would give Dr. Bueller 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.
- Create a report of 4 (body of report) for Dr. Bueller that includes the following:
- Your table or graph that contains the stock option data and the profit/loss depending on the hypothetical stock prices of US$18, US$21, US$24, or US$28 at the end of the 6 month period.
- Your recommendations on whether or not to exercise the option based on the four hypothetical stock prices. Explain the reasoning behind your recommendations.
- Answer the following questions:
- What happens if the stock price hits US$23? US$23.01?
- What purpose could adding a technology company into a stock portfolio serve?
- Please be sure that your report adheres to the general format above.