Nico Yong Is Considering the Purchase of 100 Cisco Systems

question 17

Essay

Nico Yong is considering the purchase of 100 Cisco Systems shares at $22 per share. Because the economy is picking up, Nico believes the demand for Oracle's router systems will increase substantially causing the price of Cisco's shares to increase to $30 per share. As an alternative, Nico is considering the purchase of a call option for 100 shares of Cisco at with an exercise price of $25. This 180 day option will cost Nico $200. Ignore transaction costs and dividends. How much will Nico earn on the option transaction if he purchases the option and the underlying share price rises to $30?

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Definitions:

Purchase Price

The amount of money paid to buy a good or service.

Safety Stock

Additional inventory held to protect against uncertainties in demand or supply, ensuring sufficient stock is available to meet customer needs.

Service Level

A measure of the quality of service provided, often defined as the percentage of customer demands that are met on time.

Reorder Period

The time interval between placing orders for inventory replenishment to ensure consistent supply without incurring stockouts or excessive holding costs.