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Trend of Ford shares for the last five years is shown below. Based on the trend of the graph below, I will state that the stock price was fairly stable with little fluctuations except during the period of the financial crisis. From the trend shown below, I will state that the future price is likely to be higher than the current price of $ 14.23.
This trend shows that one year from now the price of the stock will be higher than the market price currently. Therefore an investment of 100 shares today will generate a positive return. The first input under discussion here is the spot price of the underlying asset or stock as it is in most cases. This is the price of the asset on the exact valuation date or the date at which the contract is entered into between the two parties. The market price at the closing of that date is usually used.
The higher the spot price of the underlying more the seller of the call option will charge. This is because he will feel under threat that as the price is raising it is more likely to reach the strike price and therefore charge a higher rate for assuming more risk. Input options at a higher price will result in a lower price of the option itself as it is less likely to reach the strike price (Bodie, Kane and Marcus, 2007).
Assuming the price will be 15.20 then the value of the investment will be 1520 while the value is 1423 today (Finance yahoo, 2010). I should note that the stock price of the share will depend on volatility which is measured by the beta of the company. This brings us to the single biggest facet of this pricing model. This is the volatility of the stock price of the underlying asset. There are many ways in which it is measured. When looking at historical data it is a good idea to go as far back as the time to maturity is for the particular option. But many are not yet convinced of the fact that the historical data will give an exact picture of the future.
Now there are more innovative measures that include forward-looking, these are considered far more precise in measurement. Implied volatility is another concept that is important to understand here as well. This is the unpredictability entailed by the value of the options that are traded on a daily basis. In our company has a beta of 2.67 which means that the company is very volatile (Finance yahoo, 2010). The price can fluctuate to any direction at a large margin.
The alternative investment available for this investor is the bond market or other securities. One of the most salient considerations one should have in mind before venturing into bond investment is the duration. The duration is used to measure the bond price volatility by measuring the span of the bond (Bodie, Kane and Marcus, 2006). Regarding bond investment, duration is a straight forward concept because it measures how long a bond would take to repay its exact cost. The longer the duration, the more exposed the bond is to the interest environment (Maeda, 2009).
Any type of investment taken should be evaluated and a prediction be made with as much precision as possible. One would rather earn little profit than invest in a highly profitable business with high risks which might lead to loss of the money already earned. It is advisable to strike a balance between profits gained and the risks involved. An investor should also consider other factors other than the general appearance of a company. Thus one should consider the business in the company and not how much he/she likes a companys products.
References
Bodie, Z., Kane, A., & Marcus, A. (2006) Solutions manual to accompany essentials of investments. New York: McGraw-Hill.
Bodie, Z., Kane, A., & Marcus, A. (2007). Essentials of investments. New York: McGraw-Hill.
Finance yahoo. (2010). Key Statistics Ford Motor Co. Web.
Maeda, M. (2009). The complete guide to investing in bonds and bond funds: how to earn high rates of returns Safely. Florida: Atlantic Publishing Company.
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