Suppose you think a companys stock is going to appreciate substantially in value next year. The stock's current price, S₀, is $60 and the call option expiring in one year has an exercise price of $60 and a call on this stock is selling at a price of $6. With $60,000 to invest, you are considering three alternatives:

a. Invest all $60,000 in the stock

b. Invest all $60 000 in options

c. Buy 5,000 options and invest the balance in a money market fund paying 5% interest annually.

Using the above information answer the following questions:

1. Calculate the rate of return for each alternative for four stock prices ($50, $60, $70,$80) one year from now? Summarize your results in a table.

Part b.

The following data relate to a listed company.

Current share price = $160

Exercise price = $190

Maturity = 6 months

Risk free rate of return = 5% per annum

Dividend yield = 3% per annum

Standard deviation of share returns =40%

1. Using the above data, estimate the value of a call option
2. Using the calculated call option price and other relevant data, estimate the price of a put option using the put-call parity relationship.
3. If the market value of the put option is $1 less than the value of the put option estimated in ii above, explain if there are any arbitrage opportunities. If there are arbitrage opportunities, explain the strategy you would follow to profit from it. Show detailed calculations to justify your answer.