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training_data/curated/text/7198be838ef1e09f6fee9fe1fb29e412782b8734d6ce8b729b8f582698821fb8.txt

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+Understanding and Managing Leverage    • 167
+In two years, you are obligated to pay your counterparty $65 if you 
+want to hold the stock, but the decision as to whether to take possession 
+of the stock in return for payment is solely at your discretion. In essence, 
+then, you can look at buying a call option as a conditional borrowing of 
+funds sometime in the future. Buying the call option, you are saying, “I 
+may want to borrow $65 two years from now. I will pay you some interest 
+up front now, and if I decide to borrow the $65 in two years, I’ll pay you 
+that principal then. ”
+In graphic terms, we can think about this transaction like this:
+5/18/2012 5/20/2013 249 499 749 999
+-
+10
+20
+30
+40
+50
+60
+70
+80
+90
+$1.50 “prepaid interest”
+Contingent loan, the future repayment
+of principal is made solely at the
+investor’s own discretion.
+Fair Value Estimate
+Advanced Building Corp. (ABC)
+Date/Day Count
+Stock Price
+GREEN
+If the stock does indeed hit the $85 mark just at the time our option 
+expires, we will have realized a gross profit of $20 (=  $85 −  $65) on an 
+investment of $1.50, for a percentage return of 1,233 percent! Obviously, 
+the call option works very much like a loan in terms of altering the 
+investor’s capital at risk and boosting subsequent investment returns. 
+However, although the leverage looks very similar, there are two impor -
+tant differences: