The share price of Heavy Metal (HM) changes only once a month: Either it goes up by 22% or it falls by17.1%. Its price now is $42.5. The interest rate is 1.2% per month. What is the value of a one-monthcall option with an exercise price of $42.5? What is the option delta? The payoffs of the call option canbe replicated by buying shares of stock and borrowing. What amount should be invested in stock andwhat amount must be borrowed? What is the value of a two-month call option with an exercise priceof $42? What is the option delta of the two-month call over the first one-month period?

One-Month Call OptionValue: Due to the binary price movement (up or down) of HM, a traditional…

Answered: The share price of Heavy Metal (HM)…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter20: Financing With Derivatives

Section: Chapter Questions

Problem 2P

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The stock price of Heavy Metal (HM) changes only once a month: either it goes up by 24% or it falls by 20.7%. Its price now is $48. The interest rate is 1.2% per month. What is the value of a one-month call option with an exercise price of $48? What is the option delta? The payoffs of the call option can be replicated by buying shares of stock and borrowing. What amount should be invested in stock and what amount must be borrowed? What is the value of a two-month call option with an exercise price of $49? What is the option delta of the two-month call over the first one-month period?
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