Pre-Tax Rate of Return
Week 3 Assignment Questions
Calculate your pre-tax rate of return (profit divided by investment) in each of these scenarios (show your calculations):
1. buy 1,000 shares of ABC common stock at $50 and sell at $60 one year later.
2. buy 1,000 shares of ABC common stock at $50, borrowing 50% of the amount necessary to buy it, at a 2% interest rate, sell the stock at $60 one year later, paying back the loan at the same time.
3. buy listed options at $400 for 1,000 shares of ABC, giving you the right but not the obligation to buy the shares at $50 one year later, you exercise the option one year later when the stock price is $60. Also, use the Long Call chart (from the CBOE material in the lesson) to explain what is going on.
2. Some airlines hedge jet fuel prices and some do not. When oil prices declined, some airlines that had hedged jet fuel prices were worse off than those that did not hedge. Using a numerical example, show your understanding of hedging by explaining why they were worse off. Then, explain if this situation is an argument against hedging in no more than half page (double spaced).
