You use the usual forward tree model for stocks to construct a binominal tree for modeling the price movements of the stock. You are given: i) The length of the period is 1 year ii) The initial stock price is 100 iii) The stock' s volatility is 30% iv) The stock pays dividends continuously at a rate proportional to its price. The dividend yield is 5% v) The continuously compounded risk-free interest rate is 5% Calculate the price of a two-year 100-strike American call option on the stock. Possible Answers A 11.40 B 12.09 C 12.78 D 13.47 E 14.16

You use the usual forward tree model for stocks to construct a binominal tree for modeling the price movements of the stock. You are given: i) The length of the period is 1 year ii) The initial stock price is 100 iii) The stock' s volatility is 30% iv) The stock pays dividends continuously at a rate proportional to its price. The dividend yield is 5% v) The continuously compounded risk-free interest rate is 5% Calculate the price of a two-year 100-strike American call option on the stock. Possible Answers A 11.40 B 12.09 C 12.78 D 13.47 E 14.16

Name: You use the usual forward tree model for stocks to construct a binomi
Uploaded: 2024-03-20T06:51:32.000Z
Channel: Bartleby
Description: You use the usual forward tree model for stocks to construct a binominal tree for modeling the price movements ofthe stock. You are given:i) The length of the period is 1 yearii) The initial stock price is 100iii) The stock' s volatility is 30%iv) T

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter6: Risk And Return

Section: Chapter Questions

Problem 14P

See similar textbooks

Similar questions

You have estimated the following probability distributions of expected future returns for Stocks X and Y: Stock X Stock Y Probability Return Probability Return 0.1 -12 % 0.2 4 % 0.1 11 0.2 7 0.3 14 0.3 11 0.3 30 0.2 17 0.2 40 0.1 30 What is the expected rate of return for Stock X? Stock Y? Round your answers to one decimal place.Stock X: % Stock Y: % What is the standard deviation of expected returns for Stock X? For Stock Y? Round your answers to two decimal places.Stock X: % Stock Y: % Which stock would you consider to be riskier? is riskier because it has a standard deviation of returns.
Assume the Black-Scholes framework. You are given: i. S(t) is the stock price at time t. ii. The stock's volatility is 25%. iii. The continuously compounded expected rate of return is 8%. iv. The stock pays dividends continuously at a rate of 3% proportional to its price. v. The continuously compounded risk-free interest rate is 4%. vi. The current stock price is S (0) 125. Calculate Pr (S (4) > 150 S (2) - 120). Possible Answers A. 0.30 0.40 C 0.65 D. 0.70 0.85
You model a stock price S(t) using a stochastic process, with t measured in years. Your model implies that the risk-neutral distribution for the stock price at t = 4 has probability density function fs(4)(x) = x-40 {} 50 if 40 < x < 50 else Assume that interest is compounded continuously at nominal rate r = : 2.0%. Calculate the price of the stock at time 0 to the nearest pence. Do not enter the pound sign.
Consider the following information about two stocks (D and E) and two common risk factors (factor 1 and factor 2) Stock Risk factor 1 Risk factor 2 Expected return (%) D 1.2 3.4 13.1 2.6 2.6 15.4 a. Assuming that the risk free rate is 5%, determine the risk premium for factors 1 and 2 that are consistent with the expected returns for the two stocks. You expect that in one year the prices of Stock D and E will be $55 and $36 respectively and pay no dividends. What should be the price of each stock today to be consistent with the expected return levels. b. C. Determine how to you identified if Stock D and E are overvalued, fairly valued and undervalued? d. Suppose the risk premium for factor 1 as computed in (a) increases by 0.25 percent, what will be the new expected return for D and E? e. Suppose the risk premium for factor 1 as computed in (a) decreases by 0.25%, what will be the new expected return for D and E? f. Devise how would you develop a Jensen Index using Arbitrage Pricing…
Suppose that many stocks are traded in the market and that it is possible to borrow at the risk-free rate, rƒ. The characteristics of two of the stocks are as follows: Stock Expected Return Standard Deviation A 11 % 35 % B 20 % 65 % Correlation = –1 a. Calculate the expected rate of return on this risk-free portfolio? (Hint: Can a particular stock portfolio be substituted for the risk-free asset?) (Round your answer to 2 decimal places.) b. Could the equilibrium rƒ be greater than 14.15%?multiple choice Yes No
Consider a stock portfolio consisting of two units of S' and one unit of S2. Calculate the probability of delta losses over one day, if the daily log-returns (X1, X2) of the stocks are independent with X1 are S = 100, S = 50. N(0.5, 1.1), X2 N(-0.2,0.5) and the current stocks value
Assume that the risk-free rate is 7.5% and the market risk premium is 5%. What is the required return for the overall stock market? Round your answer to one decimal place.
Suppose that you observe the following information in Table 2 for stocks A and B: Table 2 Expected Return (%) 11% Stock Beta A 0.8 B 14% 1.5 The risk-free rate of return is 6% and the expected rate of return on the market index is 12%. Using the Single-Index Model, calculate the alpha of both stocks. Show your calculations. Explain what the alpha of the single-factor model represents and interpret your results.
Consider an n = 1 step binomial tree with T = 1. Suppose r, the annualized risk-free rate is 9 %, and delta, the annualized dividend rate is 8 %. Also suppose the annualized standard deviation of the continuously compounded stock return, sigma, is 35 %. Suppose further that the initial stock price, S = $110. Compute American call option prices for K = $ 55, $ 66, $ 77, $ 88,$ 99, $ 110, $ 121. a) Determine the American call premium, when K = $ 55 55 b) Determine the American call premium, when K = $ 66 | c) Determine the American call premium, when K = $ 77 d) Determine the American call premium, when K = $ 88 ? ? ? ?
Consider the three stocks in the following table. P, represents the price at time t, and Q, represents the total shares outstanding at time t. Calculate the rate of return on a price-weighted index of three stocks for the first period (t=0 to t=1). Table 2: Data for Q4 & Q5 Q0 P1 Q1 PO 100 50 105 50 A B 200 100 210 100 C 300 100 250 100
Use the following scenario analysis for Stocks X and Y to answer the questions below (round to the nearest percent). Bear Market Normal Market Bull Market Probability 0.2 0.5 0.3 Stock X -20% 18% 50% Stock Y -15% 20% 10% 1) What are the expected rates of return for Stocks X and Y? 2) What are the standard deviations of returns on Stocks X and Y? 3) Assume that of your $10,000 portfolio, you invest $9,000 in Stock X and $1,000 in Stock Y. What is the expected return on your portfolio?
Assume that the risk-free rate is 6.5% and the market risk premium is 5%. What is the required return for the overall stock market? Round your answer to one decimal place. % What is the required rate of return on a stock with a beta of 0.8? Round your answer to one decimal place. %