The Kisumu municipal council has established a sinking fund which now runs into millions of shillings. You have been hired as a consultant to assist them invest the funds in stock options which they have heard are very profitable. They are particularly interested in Kenya Airways shares which are currently trading at Ksh 24 per share and has a call option trading at Ksh 2.
The council members are interested in the following.
a. Why they should buy an option rather than the Kenya airways share. (2 marks)
b. What determines the value of an option such as the Ksh 2 at which the Kenya aiways option is trading. (2 marks)
c. If the Kenya airways share price is either going to be Kshs, 22,23,24,25 or 26. You are required to show using a suitable diagram the profit profile for a call option of this stock.( 9marks)
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