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?
B. What is his profit if the stock price at the end of six months is 23.80 per share?

Answer 1

a) Breakeven price = Purchase price + Interest amount that would have been earned on the invested amount

Breakeven price = 23 + [23*e^(0.05*1/2) - 23]

Breakeven price = 23 + 0.5822477721

Breakeven price = $23.5822477721

b) Profit = Selling price - Breakeven price

Profit = $23.80 - $23.5822477721

Profit = $0.2177522279 per share