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the next 6 months. The stock price must drop by $3.25 per share ($325 100
shares) to $36.75 per share to cover the cost of the option (ignoring any brokerage fees or dividends). If the stock price were to drop to $30 per share during the
period, Don’s net profit would be $675 [(100 shares $40/share) (100 shares
Because the return would be earned on a $325 investment, it again illustrates
the high potential return on investment that options offer. Of course, had the
stock price risen above $40 per share, Don would have lost the $325 he invested,
because there would have been no reason to exercise the option. Had the stock
price fallen to between $36.75 and $40.00 per share, Don probably would have
exercised the option to reduce his loss to an amount less than $325. The Role of Call and Put Options in Fund Raising
Although call and put options are extremely popular investment vehicles, they
play no direct role in the fund-raising activities of the financial manager. These
options are issued b...
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- Fall '13