PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Textbook Question
Chapter 21, Problem 2PS
Binomial model Imagine that Amazon’s stock price will either rise by 33.3% or fall by 25% over the next six months (see Section 21 -1). Recalculate the value of the call option (exercise price = $900) using (a) the replicating portfolio method and (b) the risk-neutral method. Explain intuitively why the option value rises from the value computed in Section 21-1.
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b) You are given the following information about Stock X and the market:
The annual effective risk-frec rate is 5%.
The expected return and volatility for Stock X and the market are shown in the table
below:
Expected Return
Volatility
Stock X
5%
40%
Market
8%
25%
The correlation between the returns of stock X and the market is -0.25.
Assume the Capital Asset Pricing Model holds.
Calculate the required return for Stock X and determine if the investor should invest
in Stock X.
Assume that expected return of the stock A in your portfolio is 14.6%. The risk premium on the stocks of the same industry are 5.8%, the risk-free rate of return is 5.9% and the inflation rate was 2.7.
Calculate beta of thisstock using Capital Asset Pricing Model(CAPM)
Consider a three-factor APT model. The factors and associated risk premiums are:
Factor
Risk Premium (%)
Change in gross national product (GNP)
+6.9
Change in energy prices
0.4
Change in long-term interest rates
+2.6
Calculate expected rates of return on the following stocks. The risk-free interest rate is 4.8%.
A stock whose return is uncorrelated with all three factors. (Enter your answer as a percent rounded to 1 decimal place.)
A stock with average exposure to each factor (i.e., with b = 1 for each). (Enter your answer as a percent rounded to 1 decimal place.)
A pure-play energy stock with high exposure to the energy factor (b = 1.9) but zero exposure to the other two factors. (Enter your answer as a percent rounded to 2 decimal places.)
An aluminum company stock with average sensitivity to changes in interest rates and GNP, but negative exposure of b = –1.9 to the energy factor. (The aluminum company is energy-intensive and suffers when energy prices…
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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