You have $50,000 to invest. You want to either invest it all in one stock, or in options. The stock of the company you are considering- Khai Co.- is currently selling for $20 per share. There is also a call option available for Khai's stock with a $20 strike price and six months to maturity. The premium is $5. Khai pays no dividends. What is your annualized return from these two investments if, in six months, Khai is selling for $26 per share? What about $16 per share?

You have $50,000 to invest. You want to either invest it all in one stock, or in options. The stock of the company you are considering- Khai Co.- is currently selling for $20 per share. There is also a call option available for Khai's stock with a $20 strike price and six months to maturity. The premium is $5. Khai pays no dividends. What is your annualized return from these two investments if, in six months, Khai is selling for $26 per share? What about $16 per share?

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 think that there is an arbitrage opportunity on the market. The current stock price of Wesley corp. is $20 per share. A one- year put option on Wesley corp. with a strike price of $18 sells for $3.33, while the identical call sells for $7. The one-year risk- free interest rate is 8%. Assuming that the put option is fairly priced, compute the fair price of the call option and explain what you must do to exploit this arbitrage opportunity and what will be your gain.
Rebecca is interested in purchasing a European call on a hot new stock, Up, Inc. The call has a strike price of $98.00 and expires in 95 days. The current price of Up stock is $115.36, and the stock has a standard deviation of 37% per year. The risk-free interest rate is 6.29% per year. Up stock pays no dividends. Use a 365-day year. a. Using the Black-Scholes formula, compute the price of the call. b. Use put-call parity to compute the price of the put with the same strike and expiration date. (Note: Make sure to round all intermediate calculations to at least five decimal places.)
An investor sells a stock short for $97 a share. The company pays a $4.70 annual cash dividend. After a year has passed, the seller covers the short position at $85. If the margin requirement is 57 percent, what is the percentage return earned on the investment?Redo the calculations, assuming the price of the stock is $103 when the investor closes the position.Based on your calculations to both scenarios, what generalization can be inferred?
You are bullish on Telecom stock. The current market price is $110 per share, and you have $22,000 of your own to invest. You borrow an additional $22,000 from your broker at an interest rate of 6.6% per year and invest $44,000 in the stock. a. What will be your rate of return if the price of Telecom stock goes up by 8% during the next year? (Ignore the expected dividend.) (Round your answer to 2 decimal places.) b. How far does the price of Telecom stock have to fall for you to get a margin call if the maintenance margin is 30%? Assume the price fall happens immediate ly. (Round your answer to 2 decimal places.)
Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.
You were offered to buy shares of stock of a newly listed company. You decided to take 300 shares at Php 1200 per share. You plan on selling these shares when the market value doubles. If the prevailing rate of increase is 12% per year, how long do you expect to wait until you decide to sell your shares of stock? Explain your answer. Note: please sketch the cash flow diagram.
Suppose you have $28,000 to invest. You're considering Miller-Moore Equine Enterprises (MMEE), which is currently selling for $40 per share. You notice that a put option with a $40 strike is available with a premium of $2.80. Calculate your percentage return on the put option for the six-month holding period if the stock price declines to $36 per share. (Do not round intermediate calculations. Enter your 6-month return as a percent rounded to 2 decimal places. Omit the "%" sign in your response.) Percentage return %
Suppose that you plan to invest in stock A, because you believe that stock A will appreciate in the next 6 months. The stock current price is $100, and a call option on stock A expiring in 6 months has an exercise price of $100 selling at $15 per option. And you have $7500 in hand to invest the following three strategies: A: Invest entirely in stock A. B: Invest entirely in call option on stock A. C: Buy call options the amount of calls is same as the number of shares we purchase in strategy A, and invest the remaining money in T-bills at interest rate whose annual interest rate is 10%. Suppose that the possible stock price are $90, $100, $110, and $120. (a) At expiration (after 6 months), compute the rates of return for each strategy given different possible stock prices. We don't consider the premium we’ve paid for holding call options in this case. (b) Given different stock price at expiration, which strategy would you like to choose? For example, if the stock price is $90, which…
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An investor is evaluating the maximum amount they are willing to pay for a share of ABC Corporation stock. Using the Capital Asset Pricing Model they determined that their required rate of return is 9%. They estimate that the earnings per share for the next 25 years is $7.00, but only $5.00 after adjusting for inflation . Based on this information what is the maximum amount the investor should pay for one share?
6. An investor buys a one-year European-style put option on the same stock. The strike is $105, and the premium is $10. In a year, the spot stock price is $90 per share. What is the payoff from financially settling the long put position? In a year, the spot stock price is $95 per share. What is the payoff from financially settling the long put position? In a year, the spot stock price is $100 per share. What is the payoff from financially settling the long put position? In a year, the spot stock price is $105 per share. What is the payoff from financially settling the long put position? In a year, the spot stock price is $110 per share. What is the payoff from financially settling the long put position?

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