Štock A is currently traded at $100. Each year, the stock price can either go up by 10% or drop by 10%. Your manager asks you to price an Éuropean call option with a strike price of $85 and a maturity of two years from now. The YTM of a one-year zero Treasury bond is 4% and the forward rate from year one to year two is 6%. What is the call option premium as of now if you use the discount rate given in the main part of the question (i.e., The YTM of a one- year zero Treasury bond is 4% and the forward rate from year one to year two is 6%.)?

Štock A is currently traded at $100. Each year, the stock price can either go up by 10% or drop by 10%. Your manager asks you to price an Éuropean call option with a strike price of $85 and a maturity of two years from now. The YTM of a one-year zero Treasury bond is 4% and the forward rate from year one to year two is 6%. What is the call option premium as of now if you use the discount rate given in the main part of the question (i.e., The YTM of a one- year zero Treasury bond is 4% and the forward rate from year one to year two is 6%.)?

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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Stock Z is currently selling for $120. You believe that, one year from now, Stock Z will sell for either $155 (up-state) or $85 (down-state). The yield on a 1-year risk-free zero coupon bond is currently 4%. You have a European put option with a 1-year expiration date and an exercise price of $115. What is this option's delta (Δ) ?
A stock has a beginning market value of S70. It can either increase in value 30% each year or decrease in value by 30%. A 3-year European call option written on the stock has an exercise price of $70. The risk-free rate of retum is 5% per year. What is the current equilibrium price of the call option if you maintain a riskless portfolio by readjusting your relative positions in stocks and puts t the end of cach year? Please operate with 2 decimals, show all work, and choose the closest answer. MAKE SURE TO WORKOUT CLEARLY THE STEPS TO AVOID 50% PENALTY. 30.2 15.3 O 25.2 19.1
A stock price is currently $30. It is known that at the end of one year, it will be either $36 and $24. The exercise price of a one-year European call option is $32. The risk-free interest rate is 5% per annum. a. Construct a binomial tree to show the payoff of the call option at the expiration date. b. Based on the binomial tree model, what is the value of the call option?
A 4-month European call option on a stock (with dividend) is currently selling for RM5. The price of the stock is RM64 and the strike price is RM60. The risk-free interest rate is 12% p.a. A dividend of RM0.80 is expected one month from now. Is there any arbitrage opportunities? Show your working. How much is the profit/loss if at maturity the price of the stock is higher than the strike price? How much is the profit/loss if at maturity the price of the stock is lower than the strike price?
A stock price is currently $60. Over each of the next two six-month periods, it is expected to go up by 6% or down by 6%. The risk-free interest rate is 5% per year with semi-annual compounding. Part I. Use the two-step binomial tree model to calculate the value of a one-year European put option with an exercise price of $61. Part II. Discuss how you can hedge risk when you initially write the put option? Part III. Assume six months have passed, discuss how you can hedge risk when you realize that the stock price is $63.6?
Stock Y is currently selling for $35. You believe that, one year from now, Stock Y will sell for either $65 (up-state) or $25 (down-state). The yield on a 1-year risk-free zero coupon bond is currently 2.5%. You have a European call option with a 1-year expiration date and an exercise price of $40. If you where to create a strategy that replicates this option, how many shares would you need to buy (shortsell if negative)? In other words, what is the call option delta?
Consider a European put option on a non-dividend paying stock with exercise price 100 USD and expiration time in one year. Interest rate is 1 percent and the price of the stock today is 75 USD. For what price of the option is the Black-Scholes implied volatility equal to 0.35 Use excel.
A stock is selling today for $110. The stock has an annual volatility of 64 percent and the annual risk-free rate is 7 percent. c. Calculate the fair price for a 1 year European put option with an exercise price of $95. d. Calculate how much the current stock price would need to change for the purchaser of the put option to break even in one year. e. Calculate the level of volatility that would make a $95 call option sell for $30. (Use Goal Seek or Solver). f. Calculate the level of volatility that would make a $95 put option sell for $8. (Use Goal Seek or Solver). Please show work using excel
Consider a 2-year European put with a strike price of $52 on a stock whose current stock price is $50. Suppose that there are two time steps, and in each time step the stock price either moves up by 30% or moves down by 30%. Also suppose that risk-free rate is 7% per annum with continuous compounding. What is the value of the European put option?
The current price of a non-dividend paying stock is $30. Use a two-step tree to value a put option on the stock with a strike price of $32 that expires in 6 months. Each step is 3 months, and in each step the stock price either moves up by 10% or moves down by 10%. Suppose that the risk free rate is 8% per annum with continuous compounding. 1) What should be the EUROPEAN put option price today? 2) If the option was an AMERICAN put option, what should be the price today? 3) If the volatility was given as 30%, how would the AMERICAN put option price change? Volatility is 30%,
The current price of a non-dividend paying stock is $30. Use a two-step tree to value a European call option on the stock with a strike price of $32 that expires in 6 months. Each step is 3 months, the risk free rate is 8% per year with continuous compounding. What is the option price when u = 1.1 and d = 0.9? O $1.29 O $1.69 O $1.49 O None of these O $1.89 ◄ Previous Next ▸
The current price of a non-dividend paying stock is $30. Use a two -step tree to value a European call option on the stock with a strike price of $32 that expires in 6 months. Each step is 3 months, the risk free rate is 8% per annum with continuous compounding. What is the option price when the volatility is 20%? (Hint: Calculate u and d using the CRR approach.) A. $1.48 B. $1.08 C. $1.68 D. $1.28

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