ABC Inc stock is launching a new product tomorrow and a trader wishes to exploit this opportunity by holding options. The current stock price is trading at $30. The trader following the stock expects the news to cause the volatility over the next three months to be either 10% or 40%. He believes that there is a 30% chance of the first outcome and a 70% chance of the second outcome. The trader calculates the call prices for three-month options using 10% and 40% volatility. Then using the weighted-average price (from the two prices), the trader creates the implied volatilities. The output table is in the following: C Implied Volatility of the Weighted Average Price (of Columns A and B) 25.53 23.13 20.77 19.80 20.68 Strike price Call Price (calculated with 10% Vol) Call Price (calculated with 40% Vol) 24 26 6.519 4.358 6.943 5.224 28 30 32 34 2.341 0.867 0.195 0.025 0.002 3.765 2.598 1.716 1.087 0.661 22.67 24.6 36 O Discuss the characteristics of the options markets from the output table.

ABC Inc stock is launching a new product tomorrow and a trader wishes to exploit this opportunity by holding options. The current stock price is trading at $30. The trader following the stock expects the news to cause the volatility over the next three months to be either 10% or 40%. He believes that there is a 30% chance of the first outcome and a 70% chance of the second outcome. The trader calculates the call prices for three-month options using 10% and 40% volatility. Then using the weighted-average price (from the two prices), the trader creates the implied volatilities. The output table is in the following: C Implied Volatility of the Weighted Average Price (of Columns A and B) 25.53 23.13 20.77 19.80 20.68 Strike price Call Price (calculated with 10% Vol) Call Price (calculated with 40% Vol) 24 26 6.519 4.358 6.943 5.224 28 30 32 34 2.341 0.867 0.195 0.025 0.002 3.765 2.598 1.716 1.087 0.661 22.67 24.6 36 O Discuss the characteristics of the options markets from the output table.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter20: Financing With Derivatives

Section20.A: The Black-scholes Option Pricing Model

Problem 1P

See similar textbooks

Similar questions

Stock XYZ is currently trading at $75, and you are very bearish about the stock (you believe that the stock price is going to drop within the next two months). What action should you take, as a speculator, to gain from your expectation: short a call or put option and why?
Assume that you have shorted a call option on Intuit stock with a strike price of $40. The option will expire in exactly three months' time. a. If the stock is trading at $55 in three months, what will you owe? b. If the stock is trading at $35 in three months, what will you owe? c. Draw a payoff diagram showing the amount you owe at expiration as a function of the stock price at expiration. a. If the stock is trading at $55 in three months, what will you owe? If the stock is trading at $55 in three months, you will owe $ (Round to the nearest dollar.)
Question 1: ABC Inc stock is launching a new product tomorrow and a trader wishes to exploit this opportunity by holding options. The current stock price is trading at $30. The trader following the stock expects the news to cause the volatility over the next three months to be either 10% or 40%. He believes that there is a 30% chance of the first outcome and a 70% chance of the second outcome. The trader calculates the call prices for three-month options using 10% and 40% volatility. Then using the weighted-average price (from the two prices), the trader creates the implied volatilities. The output table is in the following: A B D. Strike price Call Price Call Price Implied Volatility of the Weighted Average Price (of Columns A and B) 25.53 23.13 (calculated with 10% Vol) (calculated with 40% Vol) 24 6.519 4.358 2.341 0.867 6.943 5.224 26 28 30 32 3.765 20.77 19.80 2.598 1.716 0.195 20.68 34 36 0.025 0.002 1.087 0.661 22.67 24.6 O Discuss the characteristics of the options markets from…
Suppose that call options on ExxonMobil stock with time to expiration 3 months and strike price $90 are selling at an implied volatility of 30%. ExxonMobil stock currently is $90 per share, and the risk-free rate is 4%.a. If you believe the true volatility of the stock is 32%, would you want to buy or sell call options?b. Now you need to hedge your option position against changes in the stock price. How many shares of stock will you hold for each option contract purchased or sold?
A stock is currently trading for $25 per share and an investor is interested in the following two options with a one year expiration term. Options Call Put Strike Price $28 $24 Quoted Price $2 $4 a) Calculate the intrinsic values of the call and put. b) Draw the profit diagram for a short position in the put option described above. Label the diagram well. Show all the critical points on the diagram. For example, the intercepts on axes, maximum profit or maximum loss. What price movements are required for the investor to have a positive profit? c) Draw the profit diagram for a long position in the call option. And label the diagram well. d) Suppose one month later, the stock price moves up to $30 per share, how will the prices of the call and put change? Why? Briefly explain. e) Suppose an investor purchased 10 contracts of the 28 calls and sold 10 contracts of the 24 puts. If the stock price turns out to be $30 per share in one month, what is the total profit for this investor?
Suppose that call options on ExxonMobil stock with time to expiration 3 months and strike price $104 are selling at an implied volatility of 28%. ExxonMobil stock price is $104 per share, and the risk-free rate is 6%. a. If you believe the true volatility of the stock is 30%, would you want to buy or sell call options? Buy call options Sell call options b. Now you want to hedge your option position against changes in the stock price. How many shares of stock will you hold for each option contract purchased or sold? (Round your answer to 4 decimal places.) X Answer is complete but not entirely correct. Number of 0.5753 X shares
Assume you own a call option on IBM stock with a strike price of $40. The option will expire in exactly six months time. If the stock is trading at $35 in six months, what will be the payoff of the call? Options for above is { $0.00 , $10,00 , $15.00 , $75.00 , $95.00 } Assume that you have shorted the call option described above, if the stock is trading at $55 in six months, what will you owe?Options for above is { $0.00 , $10.00 , $15.00 , $75.00 , $95.00 }If the stock is trading at $50 in six months, what will be the payoff of the call?Options for above is { $0.00 , $10.00 , $15.00 , $75.00 , $95.00 }
You own a call option on Intuit stock with a strike price of $40. The option will expire in exactly three months’ time. If the stock is trading at $55 in three months, what will be the payoff of the call? Note: practice drawing the payoff diagram. Assume that you have shorted the call option in Question 2. If the stock is trading at $55 in three months, what will you owe? Note: practice drawing the payoff diagram. (ONLY ANSWER THIS QUESTION)
a) ATH Berhad stock price 7.00 put on ATH Berhad stock 7.00 call on ATH Berhad stock You observe the following price quotes RM 7.30 RM 0.10 RM 0.50 Assuming the options have 15 days left to maturity, determine the intrinsie and time values of each option. Why is the call priced higher than put?
A.K. Scott’s stock is selling for $37 a share. A 3-month call on this stock with a strike price of $38 is priced at $2. Risk-free assets are currently returning 0.28 percent per month. a) What should be the price of a 3-month put option on this stock with a strike price of $38? b) Which of the two options is currently in the money and does that accord with your conclusions about their relative prices?
The Black-Scholes model is used by Bulldogs Inc. to value call options on the stock of National Inc. The following information was determined by the analyst:· The share price is P30.· The price of the option is at P32.· The risk-free rate is 3%.· The option matures in 6 monthsIn the formula of the current value of the call option under the Black-Scholes model, what is the exponent of “e” be? -0.015 0.15 0.25 -0.055
An investor decides to implement a STRADDLE using put options using the following data . The price of stock today is $ 59 , time frame is 6months , the staddle is constructed using a put and a call option with a strike price of $ 61 . The call cost $ 4 and put costs $ 3 . a ) What is the profit ( % ) if in 6 months , if the stock price is at $ 70 b ) What is the profit ( % ) if in 6 months , if the stock price is at $ 60 c ) At what stock price in the future , the investor will make the least / min profit ? d ) Why do investors implement / use this strategy ? For what reason ?