From your corporate finance course you may recall that debt gives corporations leverage. Options...

Question

From your corporate finance course you may recall that debt gives corporations leverage. Options also can give investors leverage. Explain how that works.

Consider a stocks that is $20 and you buy a call option with exercise price of also $20. The premium for that call price is $1. Discuss how this option gives investor leverage if stock at maturity ends up at $22.

Sumit · Accepted Answer

Leverage refers to the process by which investors can borrow the funds by using debt to increase the returns for the investors on an investment. Leverage is used by investors either by directly borrowing funds and investing in different securities or by indirectly investing in companies which use high leverage to finance their operations. Investors can study leverage by undertaking balance sheet analysis to determine Debt-Equity ratio or Return on Equity ratio.
Call Options are derivative instruments used by investors, which gives the investor right not an obligation to the investor to buy the security at the agreed price.

From your corporate finance course you may recall that debt gives corporations leverage. Options also can give investors leverage. Explain how that works. Consider a stocks that is $20 and you buy a...

Solution

Answer To This Question Is Available To Download

Related Questions & Answers

Submit New Assignment