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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Textbook Question
Chapter 25, Problem 3QP
Put–Call Parity [LO1] A stock is currently selling for $56 per share. A call option with an exercise price of $60 sells for $6.56 and expires in three months. If the risk-free rate of interest is 2.6 percent per year, compounded continuously, what is the price of a put option with the same exercise price?
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Students have asked these similar questions
3 Using Black-Scholes find the price of a European call option on a non-dividend paying stock
when the stock price is $69, the strike price is 70, the risk-free interest rate is 12% per annum,
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Question 5:
A call option on a stock that expires in a year has a strike price of $99.
The current stock price is $100 and the one-year risk free interest rate is
10%.
The price of this call is $6.
a)
Is arbitrage possible? What is the arbitrage position?
b)
do you het this minimum?
Find the minimum arbitrage profit for this strategy. When
Suppose that an American put option with a strike price of $155.5 and maturity of 12.0 months
costs $11.0. The underlying stock price equals 143. The continuously compounded risk-free rate
is 6.5 percent per year. What is the potential arbitrage profit from buying a put option on one
share of stock?
O 12.401
1.5
no arbitrage profit available
11.943
1.6783
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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- A power option pays off [max(S₁ - X),01² at time T where ST is the stock price at time T and X is the strike price. Consider the situation where X = 26 and T is one year. The stock price is currently $24 and at the end of one year it will either $30 or $18. The risk-free interest rate is 5% per annum, compounded continuously. What is the risk- neutral probability of the stock rising to $30? 0.500 0.603 0.450 None of the abovearrow_forwardPut–Call Parity The current price of a stock is $33, and the annual risk-free rate is 6%. A call option with a strike price of $32 and with 1 year until expiration has a current value of $6.56. What is the value of a put option written on the stock with the same exercise price and expiration date as the call option?arrow_forward6. Using the Pricing Equation [LO2] A one-year call option contract on Cheesy Poofs Co. stock sells for $725. In one year, the stock will be worth $64 or $81 per share. The exercise price on the call option is $70. What is the current value of the stock if the risk- free rate is 3 percent?arrow_forward
- 3.2 Find the current price of a one-year, R110-strike American put option on a non- dividend-paying stock whose current price is S(0) = 100. Assume that the continuously compounded interest rate equals r = 0.06. Use a two-period Binomial tree with u = 1.23, and d = 0.86 to calculate the price VP(0) of the put option.arrow_forwardAa.1 The current price of stock XYZ is 100. In one year, the stock price will either be 120 or 80. The annually compounded risk-free interest rate is 10%. i. Calculate the no-arbitrage price of an at-the-money European put option on XYZ expiring in one year. ii. Suppose that an equivalent call option on XYZ is also trading in the market at a price of 10. Determine if there is a mis-pricing. If there is a mis-pricing, demonstrate how you would take advantage of the arbitrage opportunity.arrow_forwardModigliani-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. 3arrow_forward
- 27. Bonus Question: A one-year European call option on XYZ with a strike price of $220 is trading at $6.58. The current stock price for Microsoft is $218. Suppose that the risk-free rate is 1%, whereas the dividend yield on Microsoft is 0. According to the Black-Scholes model (BSM), what is the implied annual volatility? Choose the best answer. (a) 0.075 (b) 0.167 (c) 0.114 (d) 0.305 28. Bonus Question Use risk-neutral valuation to value a derivative at time t that pays off $1 at time T if the price at maturity, ST goes below K, i.e., ST < K. Let St denote the price of a non-dividend paying stock at time t. Express the risk-neutral price of the derivative using the spot price (St), the strike price (K), the risk-free rate (r), the stock volatility (o), and time to maturity (7 = T - t). Hint: recall that under risk-neutral valuation and GBM, the stock price is given by ST = Ste(r)T+0√TXE where ~ (a) Φ (b) (c) Φ N(0, 1) log()+(r-)T O√T (d) Φ log(5)-(r_²²2)r αντ log()+(r-2²)r O√T…arrow_forwardSuppose that the price of a stock today is at $25. For a strike price of K = $24 a 3-month European call option on that stock is quoted with a price of $2, and a 3-month European put option on the same stock is quoted at $1.5 Assume that the risk-free rate is 10% 3. per annum. (a) Does the put-call parity hold?arrow_forwardNeed ASAP PLS A stock price is currently $65. After each 6 month, the price is expected to go up by or down with the volatility of 25%. The risk-free rate interest rate is 7% per annum with continuous compounding. Questions What will be the risk-neutral probability of an up move - p? What is the value of a 6-month European Call option with a strike price of $65?arrow_forward
- An increase in the rate of interest A fall in the level of demand A decrease in the rate of interest A stock sells P110. A call option on the stock with an exercise price of P105 and expires in 43 days. If the interest rate is 0.11 and the standard deviation of the stock's return is 0.25, what is the price of the CALL OPTION according to the Black-Scholes Model? P6.92 P8.05 T P7.68 P6.88 O Focu: States)arrow_forwardQuestion 2. (a) Use the Black-Scholes formula to find the current price of a European call option on a stock paying no income with strike 60 and maturity 18 months from now. Assume the current stock price is 50, the lognormal volatility of the stock is σ = 20%, and the constant continuously compounded interest rate is r = 10%.arrow_forward2 Question II: The S&R index spot price is 1100, the risk-free rate is 5%, and the continuous dividend yield on the index is 2%. (a) Suppose you observe a 6-month forward price of 1120. What arbitrage would you undertake? (b) Suppose you observe a 6-month forward price of 1110. What arbitrage would you undertake?arrow_forward
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