Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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S3 Q14
Today is June 4, 2020. Stock X is selling at $150 per share. The stock has a dividend yield of 5% per year. There is a call option with an August 18, 2020 expiration date and an exercise price of $145, with an implied volatility of 20%. The annual risk free rate is 1%, compounded continuously. Shares and options can only be bought and sold in whole numbers.
Requires Normal Probability Table see image
June 5th data see image
What are the gains/losses on shares and call options on June 5, 2020? Waht is the net change in the portfolio value?
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- am. 118.arrow_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_forwardSuppose that call options on XYZ stock with time to expiration 3 months and strike price $90 are selling at an implied volatility of 30% ExxonMobil stock price is $90 per share, and the risk free rate is 4%. Required: a1 If you believe the true volatility of the stock is 32%, would you want to buy or sell call options? a2-Now you want to hedge your option position against changes in the stock price. How many shares of stock will you hold for each option contract purchased or sold?arrow_forward
- Suppose that on 27 October 2022, Wall Street Journal in New York presents the following price for 27 March 2023 call options on Microsoft stock (in $ USA) strike 75 80 85 price 11 7.96 5.5 while the annual interest rate is 4% per year. On this date (27 October 2022) the Microsoft stock was trading at $81.625. Suppose we decide that the volatility of the market is 30%. Should you buy the call option as the European one with strike price $80? Justify your answer.arrow_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.ii) Calculate the price of a call option by constructing and pricing areplicating portfolio.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
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