
Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
expand_more
expand_more
format_list_bulleted
Concept explainers
Question

Transcribed Image Text:Assume that the effective 6-month interest rate is 2\%, the S&R 6-month forward price is $1020, and use the premiums in the table below
for the S&R options with 6 months to expiration.
Strike
Call
1000 93.809
Put
74.201
1020 84.470 84.470
Consider the ratio spread position on the S&R index consisting in buying four 1000-strike call options and selling three 1020-strike call
options.
a) Find the payoff as a function of S, the spot price of the S&R index in 6 months.
b) Draw payoff and profit diagrams for this ratio spread position.
c) For which values of the spot price S at expiration will this position outperform a long 1000-strike straddle?
Expert Solution

This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution
Trending nowThis is a popular solution!
Step by stepSolved in 4 steps

Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Which one of the following offers provides the highest return? Investment Option APR (Annual Percentage Rate) D A B C D 17.50% 18.00% 18.50% 17.00% A C You are indifferent among the options. C and D B Frequency of interest payment (in a year) 12 2 1 48arrow_forwardAn American call option expiring in 3 - years has an exercise price of E1,500.00 on the Eswatini stockmarket and currently trades at E1,940.00. It is anticipated that the stock will rise by a factor of 1.10 andfell by a factor of 0.80. If the interest rate is 6%; find the upward prices of the option until its expiry andthe pay - offs a binomial tree.arrow_forwardSuppose you buy one SPX call option contract with a strike of 2200. At maturity, the S&P 500 index is at 2218. What is your net gain or loss if the premium you paid was $14? (Input the amount as a positive value.)arrow_forward
- Calculate the value of a call option for the following stock. Use the Black-Scholes formula. Time to expiration Standard deviation Exercise price Stock price Annual interest rate Dividend 6 months 50% per year $50 $50 3% 0 (Do not round intermediate calculations. Round your answer to 2 decimal places.) Value of a call optionarrow_forwardA put option that expires in six months with an exercise price of $65 sells for $4.45. The stock is currently priced at $61, and the risk-free rate is 3.9 percent per year, compounded continuously. What is the price of a call option with the same exercise price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) X Answer is complete but not entirely correct. Call price $ 1.68 Xarrow_forwardAssume a stock price of $30.25, risk-free rate of 1 percent, standard deviation of 40 percent, N(d1) value of 0.7976, and an N(d2) value of 0.7089. What is the value of a six-month put with a strike price of $25 given the Black-Scholes option pricing model (rounded to the nearest cent)? $6.49 $0.83 $2.43 $1.12 None of the above are correct.arrow_forward
- Suppose ABC's stock price is currently $25. In the next six months it will either fall to $15 or rise to $40. What is the current value of a six-month call option with an exercise price of $20? The six-month risk-free interest rate is 5% (periodic rate). [Use the riskneutral valuation method]A. $20.00 B. $8.57 C. $9.52 D. $13.10arrow_forwardAssume a stock price of $31.18, risk-free rate of 3.6 percent, standard deviation of 44 percent, N(₁) value of .62789, and an N(d₂) value of .54232. What is the value of a three-month call option with a strike price of $30 given the Black-Scholes option pricing model? Question 9 options: $3.38 $3.99 $3.68 $1.76 $3.45arrow_forwardPut–call parity (S21-1) It is possible to buy three-month call options and three-month puts on stock Q. Both options have an exercise price of $60 and both are worth $10. If the interest rate is 5% a year, what is the stock price?arrow_forward
- Generic Stock Inc. (GS) is trading at $100. A call option with a strike price of $102, which expires in 6 months, costs $9.52 (assuming a risk - free rate of 5% and a volatility of 0.33). What is the Delta of this optionarrow_forward2. What are the prices of a call option and a put option with the following characteristics? Stock price = $74Exercise price = $72Risk-free rate = 2.7% per year, compounded continuouslyMaturity = 4 monthsStandard deviation = 52% per year 3. Draw the payoff picture at expiration for a long position in a call option that has a premium of $1.25 and a strike price of $30. 4. Draw the payoff picture for a short position in the call option given in Problem 2.5. Draw the payoff picture at expiration for a long position in a put option that has a premium of $3.50 and a strike price of $80. 6. Draw the payoff picture for a short position in the put option given in Problem 4.please let me have it by mornin. Thank you.arrow_forwardYou notice the following quotes for the FBM KLCI and the index options.) FBM KLCI = 1510 points 1500 call = 35 points 1500 put = 15 points At option maturity, two scenario is assumed 1. (FBM KLCI goes up to 1550 points) 2. (FBM KLCI goes down to 1450 points) (Assuming you can long/short the spot index, the risk-free rate of 2% per year and 90-day maturity for the options: ) (i)(Prove that there is mispricing by using Put-Call parity.) (ii)Outline the arbitrage strategy and show the arbitrage assuming you invested in one lot/contract. (iii) Explain the diagram of the overall position.) (iv) Show that your arbitrage strategy is indeed riskless.) BalasTeruskanarrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
- Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningCorporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education

Essentials Of Investments
Finance
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Mcgraw-hill Education,



Foundations Of Finance
Finance
ISBN:9780134897264
Author:KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:Pearson,

Fundamentals of Financial Management (MindTap Cou...
Finance
ISBN:9781337395250
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i...
Finance
ISBN:9780077861759
Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:McGraw-Hill Education