PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 21, Problem 18PS
a)
Summary Introduction
To discuss: Following options may be rational to exercise before the maturity.
b)
Summary Introduction
To discuss: Following options may be rational to exercise before the maturity.
c)
Summary Introduction
To discuss: Following options may be rational to exercise before the maturity.
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Students have asked these similar questions
Suppose 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.
2. Call Options
A. How does the price of a call option respond to the following changes, other
things equal? Does the price go up or down? Explain briefly the intuition for your
answer.
(). Stock price falls.
(i). Volatility of stock price rises
B. Suppose FlyByNight Corporation (FBN) is selling a one-year European call
option that has an exercise price of $32. Assume that FBN's stock is currently
selling for $20 and that over the coming year the price will either rise to $81 or
fall to $11. Also assume that the one-year rate of interest is 10 percent. What
would be the market price for this call option? Please explain carefully,
Assume that the current price of a stock is S0 = 100. An investor holds long one European put option with a strike price of K = 100 and short one European call option with strike K = 105. Both options mature at the same time T. Assume that the stock price at maturity is ST = 102. What is the payoff to the investor?
Select one:
a. 2
b. 1
c. 0
d. -1
e. -2
f. None of the above
Chapter 21 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 21 - Binomial model Over the coming year, Ragworts...Ch. 21 - Binomial model Imagine that Amazons stock price...Ch. 21 - Prob. 3PSCh. 21 - Binomial model Suppose a stock price can go up by...Ch. 21 - Prob. 6PSCh. 21 - Two-step binomial model Suppose that you have an...Ch. 21 - Prob. 8PSCh. 21 - Option delta a. Can the delta of a call option be...Ch. 21 - Option delta Suppose you construct an option hedge...Ch. 21 - BlackScholes model Use the BlackScholes formula to...
Ch. 21 - Option risk A call option is always riskier than...Ch. 21 - Option risk a. In Section 21-3, we calculated the...Ch. 21 - Prob. 16PSCh. 21 - Prob. 18PSCh. 21 - American options The price of Moria Mining stock...Ch. 21 - American options Suppose that you own an American...Ch. 21 - American options Recalculate the value of the...Ch. 21 - American options The current price of the stock of...Ch. 21 - American options Other things equal, which of...Ch. 21 - Option exercise Is it better to exercise a call...Ch. 21 - Option delta Use the put-call parity formula (see...Ch. 21 - Option delta Show how the option delta changes as...Ch. 21 - Dividends Your company has just awarded you a...Ch. 21 - Option risk Calculate and compare the risk (betas)...Ch. 21 - Option risk In Section 21-1, we used a simple...Ch. 21 - Prob. 30PS
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- Accounting Let there exist a non-dividend-paying stock, A, which has a current price of $80. Let there exist another stock, B, which has a current price of $100. Stock B will continuously pay dividends at a dividend yield of x. A one-year European exchange call option with underlying asset A and strike asset B is sold for $5, while a one-year European exchange put option with underlying asset A and strike asset B is sold for $15. 12% is the continuously compounded, risk-free interest rate. Calculate the value of stock B's dividend yield, x.arrow_forwardLet there exist a non-dividend-paying stock, A, which has a current price of $80. Let there exist another stock, B, which has a current price of $100. Stock B will continuously pay dividends at a dividend yield of x. A one-year European exchange call option with underlying asset A and strike asset B is sold for $5, while a one-year European exchange put option with underlying asset A and strike asset B is sold for $15. 12% is the continuously compounded, risk-free interest rate. Calculate the value of stock B's dividend yield, x.arrow_forwardSuppose company B stock is last time traded at 68.23$, and our analysis shows that in one year from now, its price would either increase or decrease by 25%. (i.e. d=0.75, u=1.25) Assume that risk-free rate is 2.5% and the company pays no dividend in this time period. 4) What would be the payoff for a long position on European Call Option written on Company B equity, with time to maturity of 1 year, and strike price of 75$? Calculate the payoff for the up and down scenariosarrow_forward
- Consider a European call option on a non-dividend-paying stock where the stock price is $33, the strike price is $36, the risk-free rate is 6% per annum, the volatility is 25% per annum and the time to maturity is 6 months. (a) Calculate u and d for a one-step binomial tree. (b) Value the option using a non arbitrage argument. (c) Assume that the option is a put instead of a call. Value the option using the risk neutral approach. (d) Verify that the European call and European put prices found in (b) and (c) satisfy the put-call parity.arrow_forwardConsider a European call option for a non-dividend paying stock currently priced at S(0) with strike price K at maturity T. If the price of the call C(0) at time t = 0 is greater than the stock's price S(0), then which of the following trading strategies, if any, produces an arbitrage opportunity? Select one option. Short sell a call option and use the funds to buy the stock. Invest the O remaining cash at the risk-free rate. O Buy a call option by borrowing cash at the risk-free rate. O Short sell a call option. Invest the funds at the risk-free rate. O No arbitrage opportunities exist.arrow_forwardANSWER C AND D PLEASE ONLY In 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.a) Find prices of Arrow-Debreu securities.b) Calculate the price of a call option by constructing and pricing areplicating portfolio. c) Calculate the price of a put option by RNVR.d) Does put-call parity hold? Explain.arrow_forward
- Suppose that a European put option to sell a share for $20.00 costs $1.00. Assume the price of the underderlying stock at expiration is S on the expiration date. Under what circumstances should the holder excercise the option. With what price the holder will make profitarrow_forward3. Suppose that a June put option to sell a share for $60 costs $4 and is held until June. (a) short position) make a profit? Under what circumstances will the seller of the option (i.e., the party with a (b) Under what circumstances will the option be exercised? (c) depends on the stock price at the maturity of the option. Draw a diagram showing how the profit from a short position in the optionarrow_forwardIn a financial market a stock is traded with a current price of 50. Next period the price of the stock can either go up with 30 per cent or go down with 25 per cent. Risk-free debt is available with an interest rate of 8 per cent. Also traded are European options on the stock with an exercise price of 45 and a time to maturity of 1, i.e. they mature next period. Does put-call parity hold? Explain.arrow_forward
- Suppose XYZ stock pays no dividends and has a current price of $50. The forward price for delivery in 1 year is $55. Suppose the 1-year eective annual interest rate is 10%. (a) Graph the payo and prot diagrams for a forward contract on XYZ stock with a forward price of $55. (b) Is there any advantage to investing in the stock or the forward contract? Why? (c) Suppose XYZ paid a dividend of $2 per year and everything else stayed the same. Now is there any advantage to investing in the stock or the forward contract? Why?arrow_forwardWrite down the formula for: fa) price of an European put option f6) price of a European calli option Koth on a non-dividend paying stock and Koth derived from the Black-Scholes-Merton Differential Equations Define every symbol in the formulae. Given that, with the usual notation, S, = 42, K = 40, r3D0.1, о %3D0.2, Т%3D0.5 N(0.7693) N(0.6298) = 0.7340 0.7791 4.79 Calculate the price of a European call option on the stock. Consider an option on a dividend paying stock with the following characteristics s, = $30 Going ex-dividend in 1.5 months. Expected Dividend is $0.5 Exercise Price is $29. Risk free rate is 5% per annum Volatility is 25% per annum Time to maturity is 4 months Calculate price if (a) European Call (b) European Put 2.52 2.52 Given further N (.3068) = 0.6205 N (.1625) = 0.5645arrow_forwardSuppose there is also a 1-year European put option on the same stock as in Question 3 with exercise price $30. The current stock price is also $25 and the stock price, in 1 year, will be either $35 (up by 40%) or $20 (down by 20%). The interest rate is 8%. This stock does not pay dividend. What is the value of the put option? Please use risk neutral probability method and assume discrete discounting. (2) What is put-call parity in option pricing? What needs to be true in order for put-call parity to hold?arrow_forward
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