d. Consider a stock with a current price of P $27 Suppose that over the next 6 months the stock price will either go up by a factor of 1.41 or down by a factor of 0.71. Consider a call option on the stock with a strike price of $25 that expires in 6 months. The nsk-free rate is 6%. (1) Using the binomial model, what are the ending values of the stock price? What are the payoffs of the call option? (2) Suppose you write one cal option and buy N shares of stock How many shares must yoCu buy to create a portfolio with a riskless payoff Ge, a hedge portfolio)? What is the payoff of the portfolio? (3 Wratis tne present value of the hedge port- folo? What is the value of the call option?.

d. Consider a stock with a current price of P $27 Suppose that over the next 6 months the stock price will either go up by a factor of 1.41 or down by a factor of 0.71. Consider a call option on the stock with a strike price of $25 that expires in 6 months. The nsk-free rate is 6%. (1) Using the binomial model, what are the ending values of the stock price? What are the payoffs of the call option? (2) Suppose you write one cal option and buy N shares of stock How many shares must yoCu buy to create a portfolio with a riskless payoff Ge, a hedge portfolio)? What is the payoff of the portfolio? (3 Wratis tne present value of the hedge port- folo? What is the value of the call option?.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Similar questions

Far a nonclividend-paying stock, yOU are giveni) The current stock price is 100 ii) At the end of one year the stock price will either be 100 u or 92 iii) The continuously compounded risk-free interest rate is 0.05 iv) The price of a one-year at the money call option on the stock is 1.78 Calculate u
Assume that you hold a call option on stock A. The call has a strike price of 50 and expires in 6 months. Stock A pays no dividends. 1. What is the payoff from the call if stock A is trading at 57 in 6 months? 2. What is the payoff from the call if stock A is trading at 45 in 6 months? 3. Draw a payoff diagram that shows the payoff of the call as a function of the underlying stock price.
13. 3. Build a three-step CRR stock price tree using the following information:•maturity: 3 months, i.e. each step is one month•annual volatility of the stock: 0.35•annual, continuously compounded risk-free rate: 1%•stock price today: 50 (b) Calculate the price of an American put option with strike K = 50.
Use the Black-Scholes formula for the following stock: Time to expiration Standard deviation Exercise price Stock price Interest rate |||||||||| Value of a call option = = 6 months 56 % per year 55 = 54 6% Calculate the value of a call option. (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "S" sign in your response.)
Let S = $100, K = $95, \sigma = 30%, r = 8%, T = 1, and \delta = 0. For simplicity, let u = 1.3, d = 0.8 and n = 2 (that is, 2 periods). When constructing the binomial tree for the European call option, what is A (Stock Share Purchased in the replicating portfolio) at the first node (Time 0)? Question 11 options: 0.1789 0.3886 1.0000 0.2550 0.6912
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.)
A stock is currently priced at $42 and will move up by a factor of 1.24 or down by a factor of .93 each period over each of the next two periods. The risk-free rate of interest is 3 percent. What is the value of a put option with a strike price of $51? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
suppose that you have a call option that is at 1.30. it has a Delta of .35 a Gamma of .06 a Theta of .02 assume Vega is constant. today the stock moves from $45 to $46. the next day (day 2) the stock moves another dollar to $47. What is the value of your call option at the end of day two
■ Yegi’s Fine Phones has a current stock price of $30. You need to findthe value of a call option with a strike price of $32 that expires in3 months. Use the binomial model with one period until expiration(i.e., t = 0.25 and n= 1). The factor for an increase in stock price isu = 1.15; the factor for a downward movement is d = 0.85. Whatare the possible stock prices at expiration? ($34.50 or $25.50)What are the option’s possible payoffs at expiration? ($2.50 or$0) What are pu and pd? (0.5422 and 0.4429) What is the currentvalue of the option (assume each month is 1/12 of a year)? ($1.36)
V4. Using a two-step binomial tree, calculate the value of an American call option where the underlying stock pays a dividend of $1 per share just before the option’s expiration. The stock is trading at $22, the strike is $20, the risk-free rate is 4%. The option is outstanding for another two years (each step in the binomial tree is one year long). The stock is expected to rise or fall 10% in each one-year period prior to expiry. Can you please explain/show in Excel including formulas.
Consider a call option on one share of BP with a strike price of $70 and exercise time 1 quarter (3 months). Suppose the current stock price for BP is S(0) = $65 per share. Suppose further that A(0) = $100, A(1) = $102 and two possible prices for S(1) are S $74 with probability 0.5, S(1) = $66 with probability 0.5. Evaluate the expected returns E(Ks) and E(Kc) for the stock and the option.
3. A stock sells for $110. A call option on the stock has an exercise price of $105 and expires in 43 days. If the interest rate is 0.11 and the standard deviation of the stock’s return is 0.25. a) Calculate the call using the Black-Scholes model b) What would be the price of a put with an exercise price of $140 and the same time until expiration? c) How does an increase in the volatility and interest rate changes affect the underlying stock’s return on an option’s value? Explain.

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