Fundamentals of Corporate Finance
11th Edition
ISBN: 9780077861704
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Chapter 25, Problem 25.3CTF
Summary Introduction
To determine: The approximate amount of change in a call option value.
Introduction:
An option is a financial instrument that derives the value of an asset from another asset. Options are of two types; they are as follows:
- Call option
- Put option
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Students have asked these similar questions
A. An option is trading at $5.03. If it has a delta of -.56, what would the price of the option be if the underlying increases by $.75? What would the price of the option be if the underlying decreases by $.55?
B. What type of option is this and how?
C. With a delta of -.56, is this option ITM, ATM or OTM and how?
An option is trading at $3.45. If it has a delta of .78, what would the price of the option be if the underlying increases by $.75?
A. What would the price of the option be if the underlying decreases by $.55?
B. What makes this a call option?
C. With a delta of .78, is this option ITM, ATM or OTM and how?
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).
Chapter 25 Solutions
Fundamentals of Corporate Finance
Ch. 25.1 - Prob. 25.1ACQCh. 25.1 - Prob. 25.1BCQCh. 25.2 - Prob. 25.2ACQCh. 25.2 - Prob. 25.2BCQCh. 25.3 - Prob. 25.3ACQCh. 25.3 - Prob. 25.3BCQCh. 25.4 - Why do we say that the equity in a leveraged firm...Ch. 25.4 - Prob. 25.4BCQCh. 25.5 - Prob. 25.5ACQCh. 25.5 - Prob. 25.5BCQ
Ch. 25 - Prob. 25.1CTFCh. 25 - Prob. 25.3CTFCh. 25 - Prob. 1CRCTCh. 25 - Prob. 2CRCTCh. 25 - Prob. 3CRCTCh. 25 - Prob. 4CRCTCh. 25 - Prob. 5CRCTCh. 25 - Prob. 6CRCTCh. 25 - Prob. 7CRCTCh. 25 - Prob. 8CRCTCh. 25 - Prob. 9CRCTCh. 25 - Prob. 10CRCTCh. 25 - Prob. 1QPCh. 25 - Prob. 2QPCh. 25 - PutCall Parity [LO1] A stock is currently selling...Ch. 25 - PutCall Parity [LO1] A put option that expires in...Ch. 25 - PutCall Parity [LO1] A put option and a call...Ch. 25 - PutCall Parity [LO1] A put option and call option...Ch. 25 - BlackScholes [LO2] What are the prices of a call...Ch. 25 - Delta [LO2] What are the deltas of a call option...Ch. 25 - BlackScholes and Asset Value [LO4] You own a lot...Ch. 25 - BlackScholes and Asset Value [L04] In the previous...Ch. 25 - Time Value of Options [LO2] You are given the...Ch. 25 - PutCall Parity [LO1] A call option with an...Ch. 25 - BlackScholes [LO2] A call option matures in six...Ch. 25 - BlackScholes [LO2] A call option has an exercise...Ch. 25 - BlackScholes [LO2] A stock is currently priced at...Ch. 25 - Prob. 16QPCh. 25 - Equity as an Option and NPV [LO4] Suppose the firm...Ch. 25 - Equity as an Option [LO4] Frostbite Thermalwear...Ch. 25 - Prob. 19QPCh. 25 - Prob. 20QPCh. 25 - Prob. 21QPCh. 25 - Prob. 22QPCh. 25 - BlackScholes and Dividends [LO2] In addition to...Ch. 25 - PutCall Parity and Dividends [LO1] The putcall...Ch. 25 - Put Delta [LO2] In the chapter, we noted that the...Ch. 25 - BlackScholes Put Pricing Model [LO2] Use the...Ch. 25 - BlackScholes [LO2] A stock is currently priced at...Ch. 25 - Delta [LO2] You purchase one call and sell one put...Ch. 25 - Prob. 1MCh. 25 - Prob. 2MCh. 25 - Prob. 3MCh. 25 - Prob. 4MCh. 25 - Prob. 5MCh. 25 - Prob. 6M
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- Suppose you write the following put option (1 option, not 1 contract containing 100 options). What is the payoff and profit at expiration if the stock price is $75? Put Strike Symbol 80 ABC210621C00040000 Last 3.32 a. payoff is -5.00; profit is 1.68 X b. payoff is -5.00; profit is 3.32 c. payoff is 0; profit is 0 d. payoff is -5.00; profit is -1.68 e. payoff is 0; profit is -3.32 Chg 1.47arrow_forward3. A stock S(0) 100 will go up to 105 or down to 95 in one time step (time T). Suppose eT 1.025. What is the present value of a put option with strike K 99 and expiry T? = =arrow_forwardAssume a stock is selling for GH¢48.50 with options available at 40, 50, and 60 strike prices.The 50 call option price is at 2.75.a. What is the intrinsic value of the 50 call?b. Is the 50 call in the money?c. Are the 40 and 60 call options in the money?arrow_forward
- 4. Consider a stock with a current price of S0 = $60. The value of the stock at time t = 1 can take one of two values: S1,u = $100, S1,d = $40. The price of a risk-free bond that pays out $1 in period t = 1 is $0.90. (a) Using a one-step binomial tree, write down the possible payoffs of a put option on stock S with strike K = $60 and maturity t = 1. (b) What is the price of this put option? (c) What is the price of a call option with strike K = $60 and maturity t = 1? Please use put-call parity to find the call price.arrow_forward4. Consider an exchange option. Suppose the initial prices (time 0) of the two stocks are S =S2 = 100 and a =0.40,. Suppose also that the returns on the stocks are uncorrelated. Assume no dividends and final maturity of the option is T = 2 year: (a) Using the closed-form expressions for the price of these options, identify the price of the exchange option when o = 0, a2 =0.20, ag =0.40, and @2 =0.60. (b) Is there a trend in the price? Intuitively, why is this the case?arrow_forwardA call option with X = $55 on a stock priced at S = $60 is sells for $12. Using a volatility estimate of σ = 0.35, you find that N(d1) = 0.7163 and N(d2) = 0.6543. The risk-free interest rate is zero. Is the implied volatility based on the option price more or less than 0.35?arrow_forward
- A PUT and a CALL option are written on a stock with a strikeprice of $60. The options are held until expiration. Suppose the stock price at expiration is $75. Call premium is $16 and Put premium is $3. The CALL option will ___ because the call is ___. But the PUT option will ___ because the put is ___, with a TIME VALUE of ___.a) Be exercised; in-the-money; not be exercised; out-of-the-money; zerob) not be exercised; out-of-the-money; be exercised; in-the-money; zeroc) Be exercised; in-the-money; not be exercised; out-of-the-money; 1d) Be exercised; in-the-money; be exercised; in-the-money; zeroe) None of the above is correctarrow_forwardQ.20 The risk manager of a large investment bank is reviewing the bank's investments in options contracts. He is particularly interested in call options contracts on shares of Hamilton Invest that the bank bought a few months ago. Hamilton Invest just unexpectedly announced that they would pay a USD 3 dividend per share in the sixth and twelfth months. The risk manager is concerned with the impact of dividends on the option's price. The risk- free rate is 5%, and the option has the following characteristics: A By how much will the price of the options change after the announcement of the dividends? Assume that N(d,) before and after the announcement of the dividend is 0.7654 and N(d₂) before and after the announcement of the dividend is 0.5489? B Strike price Expiration Underlying's Price Annual volatility The price of the option will increase by USD 3.32 USD 140 13 months USD 151 35% The price of the option will decrease by USD 3.32arrow_forwardUse the Black-Scholes formula to find the value of a call option based on the following inputs. (Round your final answer to 2 decimal places. Do not round intermediate calculations.) Stock price Exercise price Interest rate Dividend yield Time to expiration Standard deviation of stock's returns Call value GA $ $ $ 48 60 0.07 0.04 0.50 0.26arrow_forward
- Assume now that in our usual setting the stock has continuous dividends. If the interest rate is r = 0.06 and the dividends rate is q = 0.03, will the option A be greater or smaller than 0.5?arrow_forwardA call option with X = $50 on a stock currently priced at S = $55 is selling for $10. Using a volatility estimate of σ = .30, you find that N(d1 ) = .6 and N(d2 ) = .5. The risk-free interest rate is zero. Is the implied volatility based on the option price more or less than .30? Explain.arrow_forwardConsider shorting a call option c on a stock S where S = 24 is the value of the stock, K = 30 is the strike price, T = ½ is the expiration date, r = 0.04 is the continuously compounded interest rate per year, and = 0.3 is the volatility of the price of the stock. Determine the delta ratio Δ .arrow_forward
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