Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
11th Edition
ISBN: 9780077861759
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 22, Problem 27QP
Two-State Option Pricing Model Rob wishes to buy a European put option on BioLabs, Inc., a non-dividend-paying common stock, with a strike price of $50 and six months until expiration. The company’s common stock is currently selling for $45 per share, and Rob expects that the stock price will either rise to $68 or fall to 537 in six months. Rob can borrow and lend at the risk-free EAR of 5 percent.
- a. What should the put option sell for today?
- b. If no options currently trade on the stock, is there a way to create a synthetic put option with identical payoffs to the put option just described? If there is, how would you do it?
- c. How much docs the synthetic put option cost? Is this greater than, less than, or equal to what the actual put option costs? Does this make sense?
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Students have asked these similar questions
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.
What is the price of a one-month European call option given the following information: the exercise price is $19, the current share price is $19, and the risk-free interest rate is 1% per month. Furthermore, the share price is expected to be either $25 or $15 at the end of the month. The company does not pay dividends. Assume a risk-neutral world.
Group of answer choices
$3.11
$1.91
$2.49
$3.32
None of the above answers is correct.
Give typed answer
Chapter 22 Solutions
Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 22 - Options What is a call option? A put option? Under...Ch. 22 - Options Complete the following sentence for each...Ch. 22 - American and European Options What is the...Ch. 22 - Intrinsic Value What is the intrinsic value of a...Ch. 22 - Option Pricing You notice that shares of stock in...Ch. 22 - Options and Stock Risk If the risk of a stock...Ch. 22 - Option Risk True or false: The unsystematic risk...Ch. 22 - Prob. 8CQCh. 22 - Option Price and Interest Rates Suppose the...Ch. 22 - Contingent Liabilities When you take out an...
Ch. 22 - Options and Expiration Dates What is the impact of...Ch. 22 - Options and Stock Price Volatility What is the...Ch. 22 - Insurance as an Option An insurance policy is...Ch. 22 - Equity as a Call Option It is said that the equity...Ch. 22 - Prob. 15CQCh. 22 - Put Call Parity You find a put and a call with the...Ch. 22 - Put- Call Parity A put and a call have the same...Ch. 22 - Put- Call Parity One thing put-call parity tells...Ch. 22 - Two-State Option Pricing Model T-bills currently...Ch. 22 - Understanding Option Quotes Use the option quote...Ch. 22 - Calculating Payoffs Use the option quote...Ch. 22 - Two-State Option Pricing Model The price of Ervin...Ch. 22 - Two-State Option Pricing Model The price of Tara,...Ch. 22 - Put-Call Parity A stock is currently selling for...Ch. 22 - Put-Call Parity A put option that expires in six...Ch. 22 - Put-Call Parity A put option and a call option...Ch. 22 - Pot-Call Parity A put option and a call option...Ch. 22 - Black-Scholes What are the prices of a call option...Ch. 22 - Black-Scholes What are the prices of a call option...Ch. 22 - Delta What are the deltas of a call option and a...Ch. 22 - Prob. 13QPCh. 22 - Prob. 14QPCh. 22 - Time Value of Options You are given the following...Ch. 22 - Prob. 16QPCh. 22 - Prob. 17QPCh. 22 - Prob. 18QPCh. 22 - Black-Scholes A call option has an exercise price...Ch. 22 - Black-Scholes A stock is currently priced at 35. A...Ch. 22 - Equity as an Option Sunburn Sunscreen has a zero...Ch. 22 - Equity as an Option and NPV Suppose the firm in...Ch. 22 - Equity as an Option Frostbite Thermalwear has a...Ch. 22 - Mergers and Equity as an Option Suppose Sunburn...Ch. 22 - Equity as an Option and NPV A company has a single...Ch. 22 - Two-State Option Pricing Model Ken is interested...Ch. 22 - Two-State Option Pricing Model Rob wishes to buy a...Ch. 22 - Two-State Option Pricing Model Maverick...Ch. 22 - Prob. 29QPCh. 22 - Prob. 30QPCh. 22 - Prob. 31QPCh. 22 - Two-State Option Pricing and Corporate Valuation...Ch. 22 - Black-Scholes and Dividends In addition to the...Ch. 22 - Prob. 34QPCh. 22 - Prob. 35QPCh. 22 - Prob. 36QPCh. 22 - Prob. 37QPCh. 22 - Prob. 38QPCh. 22 - Prob. 1MCCh. 22 - Prob. 2MCCh. 22 - Prob. 3MCCh. 22 - Prob. 4MCCh. 22 - Prob. 5MC
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