Options are often used in combination with stocks to reduce risk or to produce other avenues of revenue. Buying protective puts guards against downside risk while allowing for upside potential. Writing covered calls allow investors to earn premium income on a stock they expect to remain stable in price. Wang Foo Ltd. has a current stock price of $100, does not pay dividends, and has an expected standard deviation of .20. Also, the risk-free rate is 6% per year, continuously compounded. The Call option price is $13.85 The Put option Price is $1.19. 1. What will be the payoff and profit of the protective put if the stock price on maturity is $80, $84, $90, $100, $110? 1. What will be the payoff and profit of the covered call if the stock price on maturity is $60, $70, $76, $80, $86?

Options are often used in combination with stocks to reduce risk or to produce other avenues of revenue. Buying protective puts guards against downside risk while allowing for upside potential. Writing covered calls allow investors to earn premium income on a stock they expect to remain stable in price. Wang Foo Ltd. has a current stock price of $100, does not pay dividends, and has an expected standard deviation of .20. Also, the risk-free rate is 6% per year, continuously compounded. The Call option price is $13.85 The Put option Price is $1.19. 1. What will be the payoff and profit of the protective put if the stock price on maturity is $80, $84, $90, $100, $110? 1. What will be the payoff and profit of the covered call if the stock price on maturity is $60, $70, $76, $80, $86?

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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g. BABA is a volatile stock and its stock price is expected to fluctuate within ±+50% from its current price level ($20). To avoid getting a marginal call, Jeremy can put more cash into his brokerage account when he first establishes the long position, i.e., his initial margin is larger than the IMR which is at 50%. What is the initial margin such that he will never get a margin call? Assume the price drop happens immediately after he purchases the stock.
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If a firm cannot invest retained earnings to earn a rate of return______________ (Pick either A- greater than or equal to or B- Less than) the required rate of return on retained earnings, it should return those funds to its stockholders. The current risk-free rate of return is 4.60% and the current market risk premium is 6.10%. Green Caterpillar Garden Supplies Inc. has a beta of 1.56. Using the Capital Asset Pricing Model (CAPM) approach, Green Caterpillar’s cost of equity is_____________% Cute Camel Woodcraft Company is closely held and, as a result, cannot generate reliable inputs for the CAPM approach. Cute Camel’s bonds yield 10.20%, and the firm’s analysts estimate that the firm’s risk premium on its stock relative to its bonds is 3.50%. Using the bond-yield-plus-risk-premium approach, the firm’s cost of equity is___________% The stock of Cold Goose Metal Works Inc. is currently selling for $25.67, and the firm expects its dividend to be $2.35…
The stock of BP, a flood insurance provider, has a marketed beta of .8. The risk free rate is 3%. You estimate that the market risk premium is 5%. Compute the expected return for BP stock. Assume that BP’s true expected return is 8%. What is BP’s stock’s alpha assuming that CAPM is the correct asset pricing model? Is BP stock fairly priced, underpriced, or overpriced? Please explain your answer
A security act as an insurance against market crashes. It pays $1 if the stock market drops 10% or more next year and $0 otherwise. Risk free rate is zero. Guess the sign of the expected return (according to CAPM) a) postive b) close to zero c) negative
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Use the following forecasted financials: (Certain cells were left intentionally blank by asker) You may need to use the CAPM model. Assume beta equals 1.09, the risk-free rate is 1.62%, and the market risk premium is 4.72%. d) Calculate the terminal value and the present value of the terminal value. Assume a long-term growth rate of 3%. e) Calculate Sherwin Williams value per share. The company has 263.3 million shares outstanding.
JJM has a beta coefficient of 1.2. currently the risk free rate is 2 percent and the anticipated return on the market is 8 percent. JJM pays a $4.50 dividend that is growing at 4 percent annually. A. what is the required return for JJM? B. GIVEN THE REQUIRED RETURN, WHAT IS THE VALUE OF THE STOCK? C. IF THE STOCK IS SELLING FOR $100, WHAT SHOULD YOU DO? D. IF THE BETA COEFFICIENT DECLINES TO 1.0, E=WHAT IS THE NEW VALUE OF THE STOCK? E. IF THE PRICE REAMINS $100, WHAT COURSE OF ACTION SHOULD YOU TAKE GIVEN THE VALUATION IN D?
Don't provide handwritten solution. Suppose Company A's stock return has a volatility of 50% and its correlation with the Market Portfolio is 80%. The expected return on the Market Portfolio is 7%, the volatility of the Market Portfolio is 20%, and the riskfree interest rate is 1%. Calculate the expected rate of return on the stock of Company A. Type your answer below, in percentage terms rounded to the nearest whole percent (e.g., 8.05% would be written as 8)
CAN I GET HELP as soon as possible please Explain your answer for each of them. Show all your work. The required return on ABC stock is 14%. The risk-free rate of return is 4% and the real rate of return is 2%. How much are investors requiring as compensation for risk? A) 8% B) 10% C) 12% D) 14% The efficient market hypothesis suggests thatA) investors should not try to outguess the market by constantly buying and selling securities. B) investors do better on average if they adopt a "buy and hold" strategy.C) buying into a mutual fund is a sensible strategy for a small investor.D) all of the above are sensible strategies.E) only A and B of the above are sensible strategies.
Porter Plumbing's stock had a required return of 12.50% last year, when the risk-free rate was 5.50% and the market risk premium was 4.75%. Then an increase in investor risk aversion caused the market risk premium to rise by 2%. The risk-free rate and the firm's beta remain unchanged. What is the company's new required rate of return? (Hint: First calculate the beta, then find the required return.) Select the correct answer. a. 15.45% b. 14.25% c. 14.55% d. 14.85% e. 15.15%

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