Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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The current price of Estelle Corporation stock is $25. In each of the next two years, this stock
price will either go up by 20% or go down by 20%. The stock pays no dividends. The one-year
risk-free interest rate is 6% and will remain constant. Using the Binomial Model, calculate the
price of a one-year call option on Estelle stock with a strike price of $25.
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- Assume that the current stock price is $50 per share, that call options can be purchased with an exercise price of $60 per share, that bank loans can be obtained for a 10 percent nominal rate, and that at expiration of the option in three months, the stock will either be valued at $30 or $70. Show that it is possible to replicate the stock payoff by borrowing and buying a call option.arrow_forwardThe current price of a non-dividend paying stock is $50. Use a two-step tree to value a European put option on the stock with a strike price of $50 that expires in 12 months. Each step is 6 months, the risk free rate is 5% per annum, and the volatility is 50%. What is the value of the option according to the two-step binomial model. Please enter your answer rounded to two decimal places (and no dollar sign).arrow_forwardThe current stock price of Chocho inc is $125. You expect the stock price a year from now to be either $134 or $86 with equal probabilities. The interest rate at which investors can borrow is 13%. Using the binomial opm, what should be the price (premium) of a call option with an exercise price of $115.00 and an expiration date one year from now?arrow_forward
- The current price of Natasha Corporation stock is $6.00. In each of the next two years, this stock price can either go up by $2.50 or go down by $2.00. The stock pays no dividends. The one-year risk-free interest rate is 3.0% and will remain constant. Using the Binomial Model, calculate the price of a two-year call option on Natasha stock with a strike price of $7.00. The price of the two-year call option is $ (Round to the nearest cent.)arrow_forwardThe price of a stock is currently $37. Over the next half year, the price is anticipated to rise to $42 or decline to $36. The upside has a 60% probability of occurring. The risk-free interest rate is 5% p.a.. What is the price of a six month call option with an exercise price of $38?arrow_forwardThe current price of a non-dividend paying stock is $60. Use a two-step tree to value an American put option on the stock with a strike price of $66 that expires in 2 years. Each step is 12 months, the risk free rate is 5% per annum, and the volatility is 30%. Which of the following is the closest to the option price? O $8.91 O $11.41 O $9.91 O $12.41arrow_forward
- The current price of a stock is $20. In 1 year, the price will be either $28 or $15. The annual risk-free rate is 7%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below. Find the price of a call option on the stock that has a strike price is of $25 and that expires in 1 year. (Hint: Use daily compounding.) Assume 365-day year. Do not round intermediate calculations. Round your answer to the nearest cent.arrow_forwardThe shares of XYZ Inc. are currently selling for $120 per share. The shares are expected to go up by 10 percent or down by 5 percent in each of the following two months (Month 1 and Month 2). XYZ Inc. is also expected to pay a dividend yield of 2 percent at the end of Month 1. The risk-free rate is 0.5 percent per month. a. What is the value of an American call option on XYZ shares, with an exercise price of $125 and two months to expiration? Use the binomial model to obtain the answer. b. Draw a binomial tree diagram for this American call option, showing the share price, call price, and whether the call should be exercised at each state during the next two months. ***Answer b onlyarrow_forward
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