Problem: Calculating net profits of options and securities using CAPM.
Q1. Calculate the net profits of each option under the following assumption. Also indicate if the option is ITM, ATM, or QTM.
Strike price of options = $100
Premium of options = $10
a.) Long position of Call option if the stock price is $125 and if the stock price is $85.
b.) Short position of Put option if the stock price is $125 and if the stock price is $85.
Q2. You expect the IBM to hit $120 per share with expected dividends of $2.50 in one year. Its current price is $105 and your research estimates the beta at 1.15. Market risk premium is .07 and the U.S. T-bill is expected to yield .05. Is the IBM a good investment? Conduct security analysis using CAPM. Can you also explain your answers.