bus 405 week

Complete problem 18 in Chapter 3 (shown below) and submit to the instructor. Show your work to find the annualized  return for each of the listed share prices. Write a 100 word analysis of the process to calculate these annualized returns.

Suppose you have $28,000 to invest. You�re considering Miller-Moore Equine Enterprises (MMEE), which is currently selling for $40 per share. You also notice that a call option with a $40 strike price and six months to maturity is available.

The premium is $4.00. MMEE pays no dividends. What is your annualized return from these two investments if, in six months, MMEE is selling for $48 per share? What about $36 per share?

When the buyer exercises the option price then he has a immediate gain of $8 per share but he had to pay $4 for every share option. This makes the net gain of $4. This is overall 10% return from the option contracts, which is gained in 6 months. Now this 10% return can be invested for next 6 months to generate more return. Using bond equivalent method we can easily find that by multiplying the return with 2 but this method is not fully accurate. It does not account the compounding in the later 6 months. And after that deducting 1 is necessary to adjust for the previous add of 1 in the equation.