PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Textbook Question
Chapter 20, Problem 21PS
Option bounds Pintail’s stock price is currently $200. A one-year American call option has an exercise price of $50 and is priced at $75. How would you take advantage of this great opportunity?
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Suppose a one-year European put option on a stock has an exercise price of $30 and oneyear European call option on the same stock has the same exercise price of $30. The call is worth 3$ and the put is worth 2$. If the one-year interest rate is 1.5%, what is the price of the underlying stock, assuming no arbitrage opportunity?
1. Option Pricing
A. Suppose an investor offers to sell you a call option for a share in Baroque Inc. (a
housing construction firm). The offer is for a one-year European call option that has
an exercise price of $130. Baroque's stock price is currently selling for $120, and
over the coming year the price will either rise to $160 or fall to $110. Also, the one-
year rate of interest is 10 percent. If the investor offers to sell the option for $10,
would you go for broke and buy a call option for Baroque? (Sorry for the bad pun.)
Please explain carefully.
B. Sketch a graph of an investor's payoff as a function of future stock price if the
investor holds both a put option with an exercise price of $130 and a share of
Baroque stock.
You buy a put option on IBM common stock. The option has an exercise price of $136 and IBM’s stock currently trades at $140. The option premium is $5 per contract.a. What is your net profit on the option if IBM’s stock price increases to $150 at expiration of the option and you exercise the option?
b. How much of the option premium is due to intrinsic value versus time value?c. What is your net profit if IBM’s stock price decreases to $130?d. Draw the payout diagram at maturity on a short put option position, option premium = $2, and the same exercise price...
(Please give the full solution I will upvote)
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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- Suppose you wrote a European put option on RDNW with an exercise of $30 and premium of $2.0. What would be your profit (per share) if the stock price at the expiration date is $26? Your Answer: Answerarrow_forwardSuppose that a European call option to buy a share for $100.00 costs $5.00 and is held untilmaturity. Under what circumstances will the holder of the option make a profit? Underwhat circumstances will the option be exercised? Draw a diagram illustrating how the profitfrom a long position in the option depends on the stock price at maturity of the option. Suppose that a European put option to sell a share for $60 costs $8 and is held untilmaturity. Under what circumstances will the seller of the option (the party with the shortposition) make a profit? Under what circumstances will the option be exercised? Draw adiagram illustrating how the profit from a short position in the option depends on thestock price at maturity of the option.arrow_forwardConsider a European call option on a non-dividend paying stock with exercise price 100 USD and expiration time in one year. Interest rate is 1 percent and the price of the stock today is 75 USD. For what price of the option is the Black-Scholes implied volatility equal to 0.35 Use excelarrow_forward
- A put option in finance allows you to sell a share of stock at a given price in the future. There are different types of put options. A European put option allows you to sell a share of stock at a given price, called the exercise price, at a particular point in time after the purchase of the option. For example, suppose you purchase a she-month European put option for a share of stock with an exercise price of $25. tf six months later, the stock price per share is $26 more, the option has no value. If in six months the stock price is lower than $26 per share, then you can purchase the stock and immediately sell it at the higher exercise price of $26. If the price per share in six months is $22.50, you can purchase a share of the stock for $22.50 and then use the put option to immediately sell the share for $26. Your profit would be the difference, $25-$22.50-$3.50 per share, less the cost of the option. If you paid $1.00 per put ption, then your profit would be $3.30-11.00-$2.50 per…arrow_forwardConsider a European put option on a non-dividend paying stock with exercise price 100 USD and expiration time in one year. Interest rate is 1 percent and the price of the stock today is 75 USD. For what price of the option is the Black-Scholes implied volatility equal to 0.35 Use excel.arrow_forwardWhat is the value of a European put option if the underlying stock price is $36, the strike price is $29, the underlying stock volatility is 41 percent, and the risk-free rate is 4 percent? Assume the option has 150 days to expiration. (Use 365 days in a year. Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.) Value of a European put option $arrow_forward
- Consider an European put option. Suppose Exercise price=$60. Expiration date=50 (and we assume 360 days of conversion). If risk-free rate is 5%, and the underlying stock price is $100, what is the lower boundary for this European put option?arrow_forwardReal Options & Game Theory Consider a stock that is priced at $200 today and a call option on that stock that gives you the right but not the obligation to buy the stock at $225 in one year’s time. There are only two scenarios: either an upside, on which the price rises to $300 or a downside that leads to a drop of $100. The risk free interest rate (rf) is 8%. What is the value of this option?arrow_forwardYou have written a call option on Walmart common stock. The option has an exercise price of $81, and Walmart’s stock currently trades at $79. The option premium is $1.60 per contract. a. How much of the option premium is due to intrinsic value versus time value? b. What is your net profit if Walmart’s stock price decreases to $77 and stays there until the option expires? c. What is your net profit on the option if Walmart’s stock price increases to $87 at expiration of the option and the option holder exercises the option?arrow_forward
- Use Two-State Binomial Option (European) Pricing Model. Suppose you bought a stock today for $38.00. The stock price can either go up by a factor of 1.30 or down by a factor of 0.70 with equal probability in 0.50 years (or 180 days). Suppose the annual risk-free rate is 3.50% and the option exercise price is 35.00. How much should be the Call Option Value that expires in 0.50 years (or 180 days)?Enter your answer in the following format: 1.23Hint: The answer is between 6.74 and 9.38arrow_forwardIn an efficient market, a one-year call option on stock S with K = $25 is traded at$7.06, the current stock price S0 = $28.5, the expected market return is 7.5% and the T-Bill yield is 4%. You are about to purchase a one-year put option on the same stock with K = $26, someone offered it to you at a price of $3.6. Should you buy it?arrow_forwardGive typing answer with explanation and conclusion 5. A European call option on Home Depot stock has a strike price of $160 and expires in 0.9 years. Home Depot stock has a current market price of $165.99 and the risk-free rate is 4%. What must be the minimum price of the option?arrow_forward
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