Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
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Chapter 22, Problem 8CQ
Summary Introduction
To explain: Whether the given stocks will sell for more or not.
Option Pricing:
Options pricing helps in determining the correct or fair price in the market. It is the value of one share on the basis of which an option is traded.
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Option Pricing Suppose a certain stock currently sells for $30 per share. If a put option and acall option are available with $30 exercise prices, which do you think will sell for more? Explain
Label the following for this diagram:
a. Name of options payoff
b. Identify whether positive or negative premium
c. Identify break-even point
d. What is the profitt or loss when stock price is $60 at maturity
e. Suppose you have this options position, should you exercise your right (if any) assuming that the stock price is $60 at maturity?
Option Payoffs and Profits
$40
Long call
$20
$0
Option Payoff
Option Profit
---- Exercise Price
-$20
-$40
$0
$20
$40
$60
$80
Payoff and Profit
Label the following for this diagram:
a. Name of options payoff
b. Identify whether positive or negative premium
c. Identify break-even point
d. What is the profit or loss when stock price is $60 at maturity
e. Suppose you have this options position, should you exercise your right (if any) assuming that the stock price is $60 at maturity?
Option Payoffs and Profits Long put
$40
$20
$0
Option Payoff
Option Profit
---- Exercise Price
-$20
-$40
$0
$20
$40
$60
$80
Stock Price At Maturity
Payoff and Profit
Chapter 22 Solutions
Corporate Finance
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 - Prob. 1MCCh. 22 - Prob. 2MCCh. 22 - Prob. 3MCCh. 22 - Prob. 4MCCh. 22 - Prob. 5MC
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- Label the following for this diagram: a. Name of options payoff b. Identify whether positive or negative premium c. Identify breakeven point d. What is the profit or loss when stock price is S60 at maturity e. Suppose you have this options position, should you exercise your right (if any) assuming that the stock price is $60 at maturity? Option Payoffs and Profits Long put $40 $20 $0 Option Payoff Option Profit Exerche Price $20 S40 $20 $40 S60 $80. Stock Price At Maturity Payoff and Profitarrow_forwardLabel the following for this diagram: a. Name of options payoff b. Identify whether positive or negative premium c. Identify break-even point d. What is the profitt or loss when stock price is $60 at maturity e. If you have this option position, should you exercise your right (if any) assuming that the stock price is $60 at maturity? Option Payoffs and Profits $40 $20 $0 Option Payoff Option Profit --- Exercise Price -$20 -$40 $0 $20 $40 $60 $80 Stock Price At Maturity Payoff and Profitarrow_forwardConsider Triple Play’s call option with a $25 strike price. The following table contains historical values for this option at different stock prices: Create a table that shows (a) stock price, (b) strike price, (c) exercise value, (d) option price, and (e) the time value, which is the option’s price less its exercise value. What happens to the time value as the stock price rises? Why?arrow_forward
- Black-Scholes Model Assume that you have been given the following information on Purcell Industries call options: According to the Black-Scholes option pricing model, what is the option’s value?arrow_forwardAssume that you have been given the following information on Purcell Corporations call options: According to the Black-Scholes option pricing model, what is the options value?arrow_forwardThree put options on a stock have the same expiration date and strike prices of $55, $60, and $65. The market prices are $3, $5, and $8, respectively. Explain how a butterfly spread can be created. Draw a profit diagram of your strategy to communicate the range of stock prices that the butterfly spread would lead to a loss. (When you draw a profit diagram, please, do consider option premia.arrow_forward
- Suppose that call options on a stock with strike prices $100 and $106 cost $8 and $5, respectively. How can the options be (the profits from option positions and the total profit).arrow_forwardThe value of an option at expiration is its _______. a. time value b. strike price c. premium d. intrinsic value Please answer fast i give you upvote.arrow_forwardA call option with a strike price of $100 costs $5. A put option with a strike price of $85 costs $4. Explain how a strangle can be created from these two options. What is the cost of this strategy? When should I exercise my options? For what range of future stock prices would the strategy lead to a gain and what is the maximum gain you can receive? Prove your answer by providing an example. 5 For what range of future stock prices would the strategy lead to a loss and what is the maximum loss you could sustain? Prove it by giving an example.arrow_forward
- 2. Derive the single - period binomial model for a put option. Include a single - period example where: u = 1.10, d = 0.95, Rf = 0.05, SO = $100, X = $100. 3. Assume ABC stock's price follows a binomial process, is trading at SO = $100, has u 1.10, d = 0.95, and probability of its price increasing in one period is 0.5 (q = 0.5). a. Show with a binomial tree ABC's possible stock prices, logarithmic returns, and probabilities after one period and two periods. . b. What are the stock's expected logarithmic return and variance for 2 periods and 3 periods? c. Define the properties of a binomial distribution.arrow_forwardSuppose you construct a strategy based on options on a stock that is currently selling for $100. The strategy is as follows: Buy one call option having an exercise price of $95. Sell two calls having an exercise price of $100. Buy one call option having an exercise price of $105. All of the options are written on the same stock and all have the same expiration date. Compute the payoff (the dollars you receive) from this strategy at the expiration date for each of the following alternative stocks prices: $90, $95, $98, $100, $102, $105, and $110. What additional information would be required to determine whether your strategy had been profitable? What is the name of this strategy?arrow_forwardTopic: Option Pricing When computing, please do not round off. Only final answers must be rounded off to two decimal places Based on the Black-Scholes model, the price of a put option should be P2,800. If the underlying asset has a strike price of P60,000 and a market price of P58,500, how much is the extrinsic value of the option?arrow_forward
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