a)
To determine: Risk (beta) share of Company G’s stock
a)
Explanation of Solution
The stock beta of Company G’s stock is 1.28.
b)
To determine: One-year call option on Company G.
b)
Explanation of Solution
Calculation of value of call option:
The value of
The value of
Therefore,
Hence, the value of call option is $56.38.
Calculation of option beta:
Therefore, the option beta is 5.53.
c)
To determine: One year put option.
c)
Explanation of Solution
Calculation of one year put option:
From the put-call parity relationship,
Therefore, to replicate the put pay-offs, person X would buy a call with $400 as an exercise price and invest the present value of exercise price and sell the short stock.
The risk can be as follows,
Therefore risk is -4.67.
d)
To determine: One share stock plus one put option.
d)
Explanation of Solution
Calculation of one share plus one option:
It is related to previous question, except the stock positions cancel out, which leaves us with an exercise price of $400 investment in the present value of exercise price.
The risk can be as follows,
Therefore, risk is 0.704 which partially hedged the position.
e)
To determine: One share stock plus one put option minus one call option.
e)
Explanation of Solution
Calculation of one share plus one option minus one call option:
It is related to previous question, except the all call positions cancel out, which leaves us with an investment in the present value of exercise price.
The risk can be as follows,
Therefore, risk is 0.00 which reduced our position to risk-free loan.
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Chapter 21 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
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