PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 22, Problem 7PS
Expansion options Look again at Table 22.2. How does the value in 1982 of the option to invest in the Mark II change if
- a. The investment required for the Mark II is $800 million (vs. $900 million)?
- b. The present value of the Mark II in 1982 is $500 million (vs. $467 million)?
- c. The standard deviation of the Mark II’s present value is only 20% (vs. 35%)?
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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?
Use the following data to estimate the value of a European put option with X = $120. The current stock price now is SO = $100. The two possibilities for ST are $150 and $80. If the risk-free rate is 10%, estimate the value of the put option now.
a. P0 = $0 b. P0 = $40 c. P0 = $20.78 d. P0 = $22.86
Modigliani-Miller Theorem I.
7. 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.
(i). Exercise price rises.
(ii). Volatility of stock price rises.
3
Chapter 22 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 22 - Real options Respond to the following comments. a....Ch. 22 - Prob. 2PSCh. 22 - Real options True or false? a. Real-options...Ch. 22 - Prob. 4PSCh. 22 - Real options Describe each of the following...Ch. 22 - Expansion options Look again at the valuation in...Ch. 22 - Expansion options Look again at Table 22.2. How...Ch. 22 - Prob. 8PSCh. 22 - Timing options Look back at the Malted Herring...Ch. 22 - Prob. 10PS
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
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- Calculate a one-year holding period return (HPR) for the following two investment alternatives: Which investment would you prefer, assuming they are of equal risk? Explain. The HPR for investment X is %. (Enter as a percentage and round to two decimal places.)arrow_forwardBetas Answer the questions beiow for assets A to D shown in the following table. Asset Beta so B 1.60 - 20 D .90 a. What impact would a 10% increase in the market return be expected to have on each asser's return? b. What impact would a 10% decrease in the market return be expected to have on each asser's return? c. If you were certain that the market retum would increase in the near future, which asset would you prefer? Why? d. If you were certain that the market return would decrease in the near future, which asset would you prefer? Why?arrow_forward?Q.19 Consider a European call option with the following parameters: Assuming a risk-free annual rate of 8%, what is the probability that the option will be exercised in a risk- neutral world? (If required, use the table at the beginning of the document for statistical calculations.) Strike price USD 48 Expiration 6 months Underlying's Price USD 50 Annual volatility 25% A B C 0.70 0.5761 0.6443 D 0.3668arrow_forward
- Consider the following balance sheet (in millions) for an FI: Assets Liabilities Duration = 10 years $950 Duration = 2 years $860 Equity $90 What is the FI's duration gap, and FI's interest rate risk exposure ? How can the FI use futures and forward contracts to put on a macrohedge? What is the impact on the FI's equity value if the relative change in interest rates is an increase of 1 percent? That is, DR/(1+R) = 0.01. Suppose that the FI in part (c) macrohedges using Treasury bond futures that are currently priced at 96. What is the impact on the FI's futures position if the relative change in all interest rates is an increase of 1 percent? That is, DR/(1+R) = 0.01. Assume that the deliverable Treasury bond has a duration of nine years. If the FI wants to macrohedge, how many Treasury bond futures contracts does it need?arrow_forward5 Consider an asset with current price 26 that provides income 0.50 in 3 months time. The price of a 6-month European call on the asset with strike 24 is ct = 1.75 and the risk free rate is4.5% for all maturities.(i) Show that there is an arbitrage opportunity.(ii) Construct an appropriate arbitrage portfolio to take advantage of the situation and determine the profit per call option used.arrow_forwardConsider a put option on a stock that currently sells for £100, but may rise to £120 or fall to £80 after 1 year. The risk free rate of return is 10%, and the exercise price is £90. (a) Calculate the value of the put option using the risk-neutral valuation relationship (RNVR). Explain the reasoning behind your calculations.arrow_forward
- Consider a 3-month European call option on a non-dividend-paying stock. The current stock price is $20, the risk-free rate is 6% per annum, and the strike price is $20. Assume a risk-neutral world. You calculate the following values using the Black-Scholes-Merton model: d1 = 0.2000 N(d1) = 0.5793 d2 = 0.1000 N(d2) = 0.5398 a) What is the probability that the call option will be exercised? b) What is the expected stock price at the option’s expiration in 3 months? Assume that all values of the stock price less than $20 are counted as zero. c) What is the expected payoff on the option at expiration (in 3 months)? d) Calculate the PV of the expected payoff from part c).arrow_forwardSuppose we have both a European call option and put option with an exercise price of $53 and the underlying stock is currently priced at $50. We are to note also that both options will expiry in six months. Further, market surveys suggest that the price of the stock can either go up by 20% or decrease by 25%. The current risk-free rate of interest is 2% per annum. Required: (a) What is the expected price of the underlying asset at expiry date? (b) What is the value of the call option, using the binomial model? (c) If the put option is selling for $4.80, what should be the price of the call option to avoid arbitrage?arrow_forwardSuppose that a call option to buy a share for $200 costs $10. What is the delta of this option today if the current stock price is $180? (ignore time value of the option) A. around 2 B. None of these answers are correct. C. around 0.5 D. close to 0 E. close to 1arrow_forward
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