PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Textbook Question
Chapter 20, Problem 12PS
Option combinations Discuss briefly the risks and payoffs of the following positions:
- a. Buy stock and a put option on the stock.
- b. Buy stock.
- c. Buy call.
- d. Buy stock and sell call option on the stock.
- e. Buy bond.
- f. Buy stock, buy put, and sell call.
- g. Sell put.
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Please answer one of the following questions in detail, providing examples whenever applicable.
Discuss the risks and payoffs of the following positions, accompanied by payoff graphs.
Buy stock and a put option on the stock.
Buy a stock.
Buy a call.
Buy stock and sell a call option on the stock (covered call).
Buy a bond.
Buy stock, buy a put, and sell a call.
Sell a put (naked put).
Discuss the risks and payoffs of the following positions, accompanied by payoff graphs.
Buy a stock.
Buy a call.
Buy stock and sell a call option on the stock (covered call).
Discuss the risks and payoffs of the following positions, accompanied by payoff graphs.
Buy a bond.
Buy stock, buy a put, and sell a call.
Sell a put (naked put).
Chapter 20 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 20 - Vocabulary Complete the following passage: A _____...Ch. 20 - Option payoffs Note Figure 20.12 below. Match each...Ch. 20 - Option payoffs Look again at Figure 20.12. It...Ch. 20 - Option payoffs What is a call option worth at...Ch. 20 - Option payoffs The buyer of the call and the...Ch. 20 - Option combinations Suppose that you hold a share...Ch. 20 - Option combinations Dr. Livingstone 1. Presume...Ch. 20 - Option combinations Suppose you buy a one-year...Ch. 20 - Option combinations Suppose that Mr. Colleoni...Ch. 20 - Option combinations Option traders often refer to...
Ch. 20 - Prob. 11PSCh. 20 - Option combinations Discuss briefly the risks and...Ch. 20 - Put-call parity A European call and put option...Ch. 20 - Putcall parity a. If you cant sell a share short,...Ch. 20 - Putcall parity The common stock of Triangular File...Ch. 20 - Put-call parity What is put-call parity and why...Ch. 20 - Putcall parity There is another strategy involving...Ch. 20 - Putcall parity It is possible to buy three-month...Ch. 20 - Putcall parity In April 2017, Facebooks stock...Ch. 20 - Option bounds Pintails stock price is currently...Ch. 20 - Option values How does the price of a call option...Ch. 20 - Option values Respond to the following statements....Ch. 20 - Option values FX Bank has succeeded in hiring ace...Ch. 20 - Option values Is it more valuable to own an option...Ch. 20 - Option values Youve just completed a month-long...Ch. 20 - Option values Table 20.4 lists some prices of...Ch. 20 - Option bounds Problem 21 considered an arbitrage...Ch. 20 - Prob. 30PSCh. 20 - Prob. 31PSCh. 20 - Prob. 32PS
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Describe what a stock option is. what does it means to buy a "put" or a "call" and what you are expecting the stock to do for each (ie go up or down in price). Discuss when you would make money on a put option and when you would make money on a call option.arrow_forwardIn the Black-Scholes option pricing model, the value of a call is inversely related to: a. the risk-free interest stock b. the volatility of the stock c. its time to expiration date d. its stock price e. its strike pricearrow_forwardDescribe the effect of a change in each of the following factorson the value of a call option: (1) stock price, (2) exercise price,(3) option life, (4) risk-free rate, and (5) stock return standarddeviation (i.e., risk of stock).arrow_forward
- 2. Graph a call to buy option and explain how its payoff is given. Explain when it is in the money, at the money and out of the money.arrow_forwardDescribe how a typical stock option plan works. What are someproblems with a typical stock option plan?arrow_forwardDefine each of the following terms:a. Derivative; natural hedgeb. Option; call option; put optionc. Long-term Equity Anticipation Security (LEAPS)d. Exercise value; strike (exercise) pricee. Binomial Option Pricing Model; Black–Scholes Option Pricing Model; riskless hedgef. Futures contract; forward contractg. Commodity futures; financial futuresh. Swap; structured notei. Inverse floaterj. Risk managementk. Speculationl. Hedging; long hedges; short hedges; perfect hedgearrow_forward
- Both call and put options are affected by the following five factors: the exercise price, the underlying stock price, the time to expiration, the stock’s standard deviation, and the risk-free rate. However, the direction of the effects on call and put options could be different. Use the following table to identify whether each statement describes put options or call options. Statement Put Option Call Option 1. When the exercise price increases, option prices increase. 2. An option is more valuable the longer the maturity. 3. The effect of the time to maturity on the option prices is indeterminate. 4. As the risk-free rate increases, the value of the option increases.arrow_forwardBriefly describe the use of stock options in acompensation plan. What are some potential problems with stock options as a form ofcompensation?arrow_forwarda. Explain the covered call options strategy b. Graphically show a covered call options strategy, including payoff. Explain why an investor mayuse this option strategy.c. Using put-call parity, explain the shape of the payoff line (in part (a) of this question). Whatoption position does it look like and why?arrow_forward
- a)discuss the put-call parity of options on futures, and use it to value put options on futures. b)discuss the pricing model for options on futures. c) demonstrate an understanding of butterfly spreads by defining butterfly spreads, discussing the circumstances under which investors would use a butterfly spread strategy. d) demonstrate an understanding of straddles by defining straddles, discussing the circumstances under which investors would use a straddle strategy. e) demonstrate an understanding of box spreads by defining box spreads, discussing the circumstances under which investors would use a box spread strategy.arrow_forwardDescribe the five variables (Assets price, Strick price or Exercise Price, Risk- Free- Rate, Time to Expiration, Volatility) that Black-Scholes-Merton Formula uses to calculate the price of call and put options. Explain how the change in these variables (Assets price, Strick price or Exercise Price, Risk- Free- Rate, Time to Expiration, Volatility) affects the price of the option.arrow_forwardWhat impact does each of the followingparameters have on the value of a call option?(1) Current stock pricearrow_forward
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