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Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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3. Suppose the current stock price is $50 and you believe that, one year from now, the stock will sell for either $60 (up-state) or $30 (down-state). The yield on a 1-year risk-free zero coupon bond is currently 4%. What would be the call option delta (Δ) with an exercise price of $40? (SHOW YOUR WORK)
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- My broker just called and offered to sell me a stock with an expected return of 30% annually. If the risk-free rate is 2% and the expected return on the market is 16%, then how much riskier is this stock than the average stock in the market? Select one: O a. 1.0x (same risk) O b. 2.0x (twice as risky) O c. 2.27x O d. 3.0x Oe. None of the above.arrow_forwardD3) Finance What is the probability that the put option is OTM at maturity if: the Stock is S = $195.00, no dividend is paid, the risk-free rate is r = 2.40%, the strike price is K = 209.00, the maturity is T = 23 months and the parameters are d1 = 0.2328 and d2 = -0.3175?arrow_forwardYou are pricing options with the following characteristics: •Current stock price (St): $35.60 •Exercise price (X): $50 •Time to expiration (T-t): 9 months •Risk-free rate (rf): 3.25% •Volatility (0): 45% (a): What is the Black-Scholes value of call option? In your hand-written solution, provide the calculations of d1,d2, and the final call price. Use Excel or another spreadsheet program to compute the values of N(d1) and N(d2). See the notes for details. (b): Using put-call parity, what is the value of a put option? For this case, assume continuous compounding, which implies that PVt(X)=e-r(T-t).X.arrow_forward
- please answer as soon as possible?arrow_forwardA firm wishes to bid on a contract that is expected to yield the following after-tax net cash flows at the end of each year: Year Net Cash Flow 1 $3,000 2 10,000 3 9,000 4 8,000 5 4,000 6 6,000 7 4,000 8 -$1,500 To secure the contract, the firm must spend $50,000 to retool its plant. This retooling will have no salvage value at the end of the 8 years. Comparable investment alternatives are available to the firm that earn 11 percent compounded annually. The depreciation tax benefit from the retooling is reflected in the net cash flows in the table. Use Table II to answer the questions. Compute the project's net present value. Round your answer to the nearest dollar. NPV: $ Should the project be adopted? The project be adopted. What is the meaning of the computed net present value figure? Round your answer to the nearest dollar. The value of the firm, and therefore the shareholders’ wealth, is by $ as a result of…arrow_forwardAssume the one period binomial model with initial share price £400, up and down factors u = 1.25, d = 0.9 and interest compounded at nominal rate (per time period) of 5%. Consider an option with payoff (S(0) + S(1))/2. The replicating portfolio for this option at time 0 will have shares and pounds in a bank. State your answers to three significant figures.arrow_forward
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- Suppose that a stock price is currently 56 dollars, and it is known that five months from now, the price will be either 22 percent higher or 22 percent lower. Find the value of a European put option on the stock that expires five months from now, and has a strike price of 55 dollars. Assume that no arbitrage opportunities exist, and a risk-free interest rate of 6 percent.arrow_forwardA stock price is currently $52. Its volatility is 35% p.a. . The risk-free interest rate is 8% p.a. with continuous compounding. What is the value of a 2-year European call option with a strike price of $55, using a 2-step binomial tree? Without doing any calculations, explain what would happen to the value of the option if the stock volatility decreasesarrow_forwardImagine all investors are risk-neutral and we have the following binomial tree: 0 Stock: So= 80 1 100 72 2 120 90 86.4 64.8 Using the risk-neutral option valuation approach, calculate the price of a two-year put option on this stock with a strike price $92. Assume that the risk-free rate is 3% per year. Also assume the stock does not pay a dividend. Pick the closest number.arrow_forward
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