Q.20The risk manager of a large investment bank is reviewing the bank's investments in options contracts. He isparticularly interested in call options contracts on shares of Hamilton Invest that the bank bought a few monthsago. Hamilton Invest just unexpectedly announced that they would pay a USD 3 dividend per share in the sixthand twelfth months. The risk manager is concerned with the impact of dividends on the option's price. The risk-free rate is 5%, and the option has the following characteristics:ABy how much will the price of the options change after the announcement of the dividends? Assume that N(d,)before and after the announcement of the dividend is 0.7654 and N(d₂) before and after the announcement ofthe dividend is 0.5489?BStrike priceExpirationUnderlying's PriceAnnual volatilityTheprice of the option will increase by USD 3.32USD 14013 monthsUSD 15135%The price of the option will decrease by USD 3.32 ABBy how much will the price of the options change after the announcement of the dividends? Assume that N(₂)before and after the announcement of the dividend is 0.7654 and N(d₂) before and after the announcement ofthe dividend is 0.5489?CpriceDExpirationUnderlying's PriceAnnual volatilityThe price of the option will increase by USD 3.32The price of the option will decrease by USD 3.32The price of the option will decrease by USD 3.82USD 14013 monthsUSD 15135%The price of the option will decrease by USD 4.42R

The equation used to determine the hypothetical pricing of options is the Black-Scholes model,…

The risk manager of a large investment bank is reviewing the bank's investments in options contracts. He is particularly interested in call options contracts on shares of Hamilton Invest that the bank bought a few months ago. Hamilton Invest just unexpectedly announced that they would pay a USD 3 dividend per share in the sixth and twelfth months. The risk manager is concerned with the impact of dividends on the option's price. The risk- free rate is 5%, and the option has the following characteristics: A Strike price Expiration Underlying's Price Annual volatility By how much will the price of the options change after the announcement of the dividends? Assume that N(d₁) before and after the announcement of the dividend is 0.7654 and N(de) before and after the announcement of the dividend is 0.5489? B The price of the option will increase by USD 3.32 USD 140 13 months USD 151 35% The price of the option will decrease by USD 3.32

The risk manager of a large investment bank is reviewing the bank's investments in options contracts. He is particularly interested in call options contracts on shares of Hamilton Invest that the bank bought a few months ago. Hamilton Invest just unexpectedly announced that they would pay a USD 3 dividend per share in the sixth and twelfth months. The risk manager is concerned with the impact of dividends on the option's price. The risk- free rate is 5%, and the option has the following characteristics: A Strike price Expiration Underlying's Price Annual volatility By how much will the price of the options change after the announcement of the dividends? Assume that N(d₁) before and after the announcement of the dividend is 0.7654 and N(de) before and after the announcement of the dividend is 0.5489? B The price of the option will increase by USD 3.32 USD 140 13 months USD 151 35% The price of the option will decrease by USD 3.32

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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You work in a derivatives section in an investment bank. In August, a customer who holds Texa stock priced at $150 is worried that the stock will fall in price by the end of the year. Assuming the stock does not pay a dividend, can you sell the customer an option that insures that if the stock price falls below $145, their stock plus option payoff will never fall below $145? Explain.
Suppose an investor sells 100 stocks by short selling for 6 months, the stock price is 30 yuan, and the annual interest rate of 6 months is fixed at 3%. How can I use forward contracts to avoid risks? What is the execution price? Please analyze if the stock price rises to 35 yuan or falls to 25 yuan after 6 months of hedging, what are the losses of this investor?
a) Caty wanted to hedge her company exposure in commodity, stocks, interest rates and currencies on derivatives market. You are assigned by your bank manager to explain to her on the derivatives instrument that available in Malaysia market and recommend the appropriate hedging for her company. b) Based on the table below, you invested 40% on Stock A and B and 20% on Stock C. Calculate the expected return on this portfolio. Year Expected rate of returns Stock A Stock B Stock C 1 0.18 0.13 0.05 2 0.17 0.12 0.10 3 0.02 0.07 0.13 4 0.12 0.09 0.16 5 0.12 0.08 0.28
Suppose an investor buys 300 stocks for 3 months, the stock price is 10 yuan, and the annual interest rate for 3 months is fixed at 5%. How can I use forward contracts to avoid risks? What is the execution price? Please analyze if the stock price rises to 15 yuan or falls to 8 yuan after 3 months of hedging, what are the losses of this investor?
You work on a proprietary trading desk of a large investment bank, and you have been asked for a quote on the sale of a call option with a strike price of $53 and one year of expiration. The call option would be written on a stock that does not pay a dividend. From your analysis, you expect that the stock will either increase to $73 or decrease to $38 over the next year. The current price of the underlying stock is $53, and the risk-free interest rate is 5% per annum. What is this fair market value for the call option under these conditions? Do not round intermediate calculations. Round your answer to the nearest cent. $
Suppose that you sell short 1,000 shares of Xtel, currently selling for $20 per share, and give your broker $15,000 to establish your margin account.a. If you earn no interest on the funds in your margin account, what will be your rate of return after one year if Xtel stock is selling at: (i) $22; (ii) $20; (iii) $18? Assume that Xtel pays no dividends.b. If the maintenance margin is 25%, how high can Xtel’s price rise before you get a margin call?c. Redo parts (a) and (b), but now assume that Xtel also has paid a year-end dividend of $1 per share. The prices in part (a) should be interpreted as ex-dividend, that is, prices after the dividend has been paid.
A bank has just sold a call option on 500,000 shares of a stock. The strike price is 40; the stock price is 40; the risk-free rate is 5%; the volatility is 30%; and the time to maturity is 3 months. a) What position should the company take in the stock for delta neutrality? b) Suppose that the bank does set up a delta neutral position as soon as the option has been sold and the stock price jumps to 42 within the first hour of trading. What trade is necessary to maintain delta neutrality? Explain whether the bank has gained or lost money in this situation. (You do not need to calculate the exact amount gained or lost.) c) Repeat part b) on the assumption that the stock jumps to 38 instead of 42. a) Give an example of how a swap might be used by a portfolio manager. b) Explain the nature of the credit risks to a financial institution in a swap agreement. The quoted futures price corresponds to a forward rate of 8% per annum with quarterly compounding and actual/360. The parameters for…
1. Alice is a Financial Risk Manager in a large offshore bank in Kuala Lumpur. She intends to buy additional stocks valued at RM15 million, however, she expects to receive the fund 3 months from today. What is the risk? Select one: A. Three months later the price of the stocks might move SIDE-WAY B. Three months later the price of the stocks might DECREASE to RM10 million C. Three months later the price of the stocks might INCREASE to RM20 million D. Three months later the price of the stocks might move SIDE-WAY to RM15 million
Identify and explain the markets in which the following in which the following trade in: used cars, paintings and rare coins. If, An investor initially pays K6 000 towards the purchase of K10 000 worth of shares at K100 each borrowing the rest from a broker, draw up the investor’s simple balance sheet to reflect this transaction and Calculate the initial margin and the margin if the share price falls to K70. Suppose the maintenance margin is 30 %. How far could the stock price fall before the investor would get a margin call? Suppose the margin is 40 %. How far can the stock price fall before the investor gets a margin call? An investor is bullish on a stock selling for K100. He instructs his broker to sell short 1000 borrowed shares. If the broker has a 50 % requirement on short sales, draw up the investor’s simple balance sheet to reflect this transaction. What will happen if the share price falls to K70? If the broker has a maintenance margin of 30 % on short sales,…
(a) Donald is considering the merits of two securities. He is interested in the common shares ofA Co. and B Inc. The expected monthly rate of return of securities is shown below:State of Affair Probability Stock A Stock BBoom 0.1 40% -20%Normal 0.5 20% 8%Recession 0.4 -10% 15%At the time of purchase, the market value is $70/share for A and $50/share for B. Donaldplans to invest 10,000 shares of Stock A and 6,000 shares in Stock B.(i) Compute the portfolio weights of Stock A and Stock B. (ii) Compute the expected returns of Stock A and Stock B. (iii) Assume that the covariance between Stock A and Stock B is -28%2(0.0028). Computethe expected rate of return and variance of rate of return of Donald’s portfolio.(iv) If the risk-free rate is 2%, the market risk premium is 18% and the beta of Stock A is0.75, estimate the required and expected rates of return of Stock A. Should Donaldinvest in Stock A? Show the calculations.
Adam Smith is a portfolio manager with Point72 Investments, a U.S.-based asset management firm. Smith is considering using options to enhance portfolio returns and control risk. He asks his junior analyst, Tommy Hilfiger, to help him. Hilfiger collected the current market prices and data of selected instruments related to Lotus stock in the following Table. European call option on Lotus stock European put option on Lotus stock Lotus stock price Time to expiration of options in month $8 $4 $60 3 $55 10% $1.50 Exercise price of options Risk-free rate Dividend to be paid in 3 months According to the table, What will be the arbitrage profit per share without considering the transaction cost? (use this put call parity for the calculation: C + D + Ke-IT = p + S0)
Currently you own no stock or options. Today's data for Green Corporation, where the call and put have the same exercise price and expire in one year: Strike Price Put Price Call Price Stock Price $32.50 $2.85 $1.65 $30.00 a. If you construct a protective put strategy, which securities will you buy or sell, and what is your total investment today? If the stock price is $20 on the expiration date, what will be the value of your portfolio (payoff) on that day, and your net profit? b. If you construct a covered call strategy, which securities will you buy or sell, and what is your total investment today? If the stock price is $45 on the expiration date, what will be the value of your portfolio (payoff) on that day, and your net profit?

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