Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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.The price of an American call on a non-dividend-paying stock is $4. The stock price is $31, the strike price is $30, and the expiration date is in 3 months. The risk-free interest rate is 8%. The upper and lower bounds for the price of an American put on the same stock with the same strike price and expiration date is $3.00 and $2.41, respectively.
Explain carefully the arbitrage opportunities if the American put price is greater than the calculated upper bound.
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- Not sure about the correct steps to find Implied Volatility... Thank you in advancearrow_forwardSuppose that Stock XYZ is currently trading at $50 and does not pay any dividends. Using a binomial tree with two periods, we would like to price a European down-and-in call option written on this stock with a strike price of $40, barrier level of $48 and expiration date in three months. Assume that annual continuously compounded interest rate is 5% and the volatility of the stock is 20% per year. What is the price of the barrier option? 0.7.28 0.9.45 O101 O 322arrow_forwardFor a stock, you are given that: i) The current stock price is 45 ii) The stock is going to pay a dividend of 1.2 after 3 months. This is the only dividend to be paid in the coming 6 months. iii) A 6-month 42-strike European put option on the stock has a premium of 0.36 iv) The continuosly compounded risk-free interest rate is 4% Consider a 6-month 42-strike American call option on the stock. Is it optimal to excerise that call option now? Possible Answers A Yes, because the sum of implicit put protection and interest on strike is greater than the present value of dividends B No, because the sum of implicit put protection and interest on strike is greater than the present value of dividends C Yes, because the sum of implicit put protection and interest on strike is smaller than the present value of dividends D No, because the sum of implicit put protection and interest on strike is smaller than the present value of dividends E Cannot be determinedarrow_forward
- Consider two stocks: Stocks Current Price Possible Prices after one year Stock ABC $12.00 ABC + = $13.60 ABC – = $11.20 Stock XYZ $10.00 ABC + = $11.75 ABC – = $8.80 Assume a risk-free borrowing and lending rate is 5.20% and that neither stock pays dicidends, and a fractional shares can be bought and sold. Question: 1. Do you see that there opportunity to profit in this case? If so, how can that opportunity be realized? Explain your answer 2. Suppose that you are to buy at the current price, through borrowing,1000 shares of stock ABC, and sell it short. This allows you to buy stock XYZ. You also see an opportunity to engage in the bonds market risk-free2.a Do you think you can gain profit from this decision? 2.b If so, by how much? Show complete solution to justify your answerbased on higher and a lower price after one year, for both stocks.arrow_forwardConsider the following information for an individual stock Current share price is $30 Risk-free rate is 5% pa compounded continuously Volatility of the stock returns (σ) is 30% pa Strike price is $28 Time to maturity of the option is 12 months The firm is expected to pay no dividends over the next 1 year. Use the closed-form Black-Scholes model to price the European call option with the above characteristics 3.67 5.32 9.81 None of the abovearrow_forwardSuppose that a stock price is currently 51 dollars, and it is known that one month from now, the price will be either 6 percent higher or 6 percent lower. Find the value of an American call option on the stock that expires one month from now, and has a strike price of 49 dollars. Assume that no arbitrage opportunities exist, and a risk free interest rate of 10 percentarrow_forward
- True or Falsearrow_forwardQUESTION: 2. What is the fair value for a six-month European call option with a strike price of $135 over a stock which is trading at $138.15 and has a volatility of 42.5% when the risk free rate is 1.85% using the two step binomial tree? a) What is the delta of this option? b) What is the probability of an up movement in this stock? c) What is the probability of a down movement in this stock? d) What is the proportional move up for this stock e) What is the proportional move down for this stock f) What would be the value of the put option with the same strike price?arrow_forwardNonearrow_forward
- Nikularrow_forwardIn a financial market a stock is traded with a current price of 50. Next period the priceof the stock can either go up with 30 per cent or go down with 25 per cent. Risk-freedebt is available with an interest rate of 8 per cent. Also traded are European optionson the stock with an exercise price of 45 and a time to maturity of 1, i.e. they maturenext period.i) Find prices of Arrow-Debreu securities.arrow_forward4arrow_forward
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