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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An investor is looking to invest R 250,000 with the intent of getting the highest possible return. He plans to do this by holding a diverse stock portfolio with different hypothetical stocks with varying expected returns as seen in the table below. Stock Return earned Naspers 6% Sasol 15% ABSA Capitec 3% To control for risk, the following constraints are put into place: a) No more than 15% of the total investment can be put into ABSA stocks. b) At most 40% must be invested in Sasol stocks and the Capitec stocks combined. c) The amount put in Naspers stocks must be no more than the amount invested into all the other remaining stocks combined. d) All the R250,000 must be invested and no shorting is allowed. Formulate a linear programming model for this problem to get the highest return (i.e., Define and outline your decision variables, objective function and constraints). How much of the budget should be invested into each investment option? (Show your workings in Microsoft Excel)
The following is part of the computer output from a regression of monthly returns on Waterworks stock against the S&P 500 Index. A hedge fund manager believes that Waterworks is underpriced, with an alpha of 2% over the coming month. Beta 0.75 R-square 0.65 Required: a-1. If he holds a $8.0 million portfolio of Waterworks stock and wishes to hedge market exposure for the next month using one-month maturity S&P 500 futures contracts, how many contracts should he enter? The S&P 500 currently is at 2,000 and the contract multiplier is $50. Number of contracts Standard Deviation of Residuals 0.07 (1.e., 7% monthly) a-2. Should he buy or sell contracts? O Buy Sell Probability b. Assuming that monthly returns are approximately normally distributed, what is the probability that this market-neutral strategy will lose money over the next month? Assume the risk-free rate is 0.7% per month. (Do not round intermediate calculations. Round your percentage answer to 2 decimal places.) %
Assume that most of the investors in the stock market are active in an online chat group.As one of the investors holding ABC shares, you find out that the ABC stock has an expected return of 9.8% from the perspective of most investors in the chat group.In addition, you gathered the following information by carrying out market research. In your research, the market return is 6.8% and the risk-free rate is estimated to be 3%. The beta and past 1-month variance of Stock ABC is 1.2 and 7.8% respectively. The stock price exhibits an upward trend last week. Should you buy or sell Stock ABC if CAPM is correct? Why?
The common stock of the XYZ Co. has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next 3 months. The price of a 3-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4. How can you create a position involving a put, a call, and riskless lending that would have the same payoff structure as the stock at expiration? O Buy the call, sell the put; lend the present value of $40. O Sell the call, buy the put; lend the present value of $40. O Buy the call, sell the put; borrow the present value of $40. O Sell the call, buy the put; borrow the present value of $40.
A.K. Scott’s stock is selling for $37 a share. A 3-month call on this stock with a strike price of $38 is priced at $2. Risk-free assets are currently returning 0.28 percent per month. a) What should be the price of a 3-month put option on this stock with a strike price of $38? b) Which of the two options is currently in the money and does that accord with your conclusions about their relative prices?
Consider a stock priced at $33 with a standard deviation of 0.3. The risk-free rate is 0.05. There are put and call options available at exercise prices of 35 and a time to expiration of six months. The calls are priced at $2.39 and the puts cost $2.05. There are no dividends on the stock and the options are European. Assume that all transactions consist of 100 shares or one contract (100 options). Suppose the investor constructed a covered call. If the transaction is closed out when the option has three months to go and the stock price is at $39, what is the investor's profit?
You are concerned about the market volatility but have found stocks that are attractively priced. In additionto cash, your portfolio will have securities both on the LONG and SHORT sides. You want to set up your LONG/SHORT portfolio with some constraints. You will set aside 12.27% of the equity as a cash reserve to cushion any adverse margin changes and to pay any associated fees. You will maximize your buying and selling power (i.e. what you can purchase and sell on margin) using the remaining equity and loans from the broker. Your account's beginning equity is $201,290 all in cash before you start trading. You will set up your 100% beta-neutral trade on full margin, and the margin requirements are 50% on both sides. Assume that the LONG side has a weighted average beta of 1.35, while the SHORT side has a weighted average beta of 1.00. What is the value of your account's total liabilities immediately after you set up the portfolio? O $250,234 $257,185 $264,136 $271,087 $278,038
You would like to be holding a protective put position on the stock of XYZ Co. to lock in a guaranteed minimum value of $109 at year- end. XYZ currently sells for $109. Over the next year the stock price will increase by 12% or decrease by 12%. The T-bill rate is 6%. Unfortunately, no put options are traded on XYZ Co. a. Suppose the desired put option were traded. How much would it cost to purchase? (Do not round intermediate calculations and round your final answer to 2 decimal places.) Cost to purchase b. What would have been the cost of the protective put portfolio? (Do not round intermediate calculations and round your final answer to 2 decimal places.) Cost of the protective put portfolio c. What portfolio position in stock and T-bills will ensure you a payoff equal to the payoff that would be provided by a protective put with X = 109? Show that the payoff to this portfolio and the cost of establishing the portfolio match those of the desired protective put. (Do not round…
"Bein g a newly appointed analyst at Credit Suiss e, one of your prime role is to facilitate the Global head of valuation in providing detailed and timely analysis. The next meeting is beingg scheduledd for the up coming Saturdayy, and you are required to calculat e the price of a few stocks and provide their valuations. The information is mentioned below": What would be the expected price of TVC stock today, given the streams of future dividends of $4 for next 3 years, having ZERO growth rate, and 10% required rate of return? The Walgreens BossoTTs Alliance Company has recently paid dividend D0 = $3, and growth is expected to remain 5% throughout. The required rate of return is 10%. Calculate dividend streams for the next 2 years, and their PVs? You have forecasted NICIE dividends of $5, $5.70, and $5.95 over the next three years respectively. After the end of three years the anticipated selling market price of NICIE will be $135. What is NICIE stock price provided a 7% expected…
( derivative and risk management) Critically analyze the following data of Batelco Telecommunication Company . A company that is not expected to pay dividend for a year, and find the value of the call using Black Scholes call option pricing formula for the month of January 140 option. The spot price of the stock is 150 with a standard deviation of 0.6 and a risk free rate of 10% and the time to expiration is 5 months .
A stock's current price is $20 and a 3-month call with a strike price of $22 sells for $2. You have $4,000 to invest and are comparing two alternate strategies: 1) Buy 200 shares of the stock; 2) Buy 2,000 call options on the stock. Which of the following is correct? The two strategies are equally profitable when the stock price is $26.00 O b. The two strategies are equally profitable when the stock price is $22.00 О с. The option strategy is more profitable when the stock price is $26.00 LO
An investor receives an investment newsletter that recommends that she invest in a stock that has doubled the return of the S&P 500 in the last two months. It also claims that this stock is a "safe bet" for the future. Which of the following statements is correct regarding this information? The investment newsletter contains contrary information since the stock must be a high risk and therefore cannot also be a "safe bet." This investment newsletter is most likely correct because they most likely have some special knowledge about the stock. It is common for individual stocks to double the return of the S&P 500 and still be a "safe bet."

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