Question

Michael Jordan purchases (long) 10 shares of XYZ stock for 23.00 per share. Six months from now he will sell all 10 shares. The continuously compounded risk free rate is 5%. a. What is the breakeven stock price at the end of six months (reminder: the breakeven price is the value of the stock that would result in zero profit)? 230 e.OS(2) $236.82 b. What is his profit if the stock price at the end of six months is 23.80 per share?

Answer 1

To find the breakeven stock price, calculate present value using the purchase price and future value using the interest rate. For a stock price of $23.80, subtract the purchase price and transaction costs to find the profit.

Step-by-step explanation:

To determine the breakeven stock price at the end of six months, we need to calculate the present value of the stock at the purchase price and compare it to the future value of the stock after six months. The present value can be calculated using the formula PV = FV / e^(rt), where PV is the present value, FV is the future value, r is the interest rate, and t is the time in years. Let's calculate:

The breakeven stock price is $236.82.

For part b, to calculate the profit if the stock price at the end of six months is $23.80 per share, we need to subtract the purchase price and any transaction costs from the selling price. Let's calculate:

The profit would be $10.34.