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Black–Scholes [LO2] What are the prices of a call option and a put option with the following characteristics?
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Fundamentals of Corporate Finance
- 11. Which of the following will increase the value of a put option? 1 A decrease in the time to expiration. 2 A decrease in the exercise price. 3 A decrease in volatility. 4 An increase in volatility. (Ctrl)arrow_forwardABC Betal 1.05 0.90 Suppose you observe the following situation: Assume these securities are correctly priced. Based on the CAPM, expected return on the market? What is the risk-free rate? XYZ Expected Return 12.3 11.8arrow_forwardSuppose you observe the following situation: Security Beta Expected Return Peat Company 1.70 13.60 Re - Peat Company 0.85 10.80 Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the market? What is the risk - free rate?arrow_forward
- P Securities A, B, C and D have an expected return of 5%, 10%, 7.5% and 5%, respectively. The betas of C and D are both 1.1; while A has a beta of 0.7 and B a beta of 1.5. What does this imply about the alpha of security D? E(r) 10 5.0 0.7 0 OA The alpha of security D is 0% 1 OR. The alpha of security D is +2.5% OCThe alpha of security D cannot be determined. OD The wipha of security Dis-2.5% 1.5 w SMLarrow_forwardConsider the following information: Standard Deviation Beta Security C Security K Which security will have a higher expected return? Oa. C O b. K 20% 30% 1.25 0.95 A Oc Both securities will have the same expected return Od. Insufficient information to answer the questionarrow_forwardWhat does it mean to assert that the delta of a call option is 0.7? How can a short position in 1,000 options be made delta neutral when the delta of each option is 0.7?arrow_forward
- S1. Q6 What are the five assumptions in the Black-Scholes Merton model for option pricing?arrow_forwardThe hedge ratio of an at-the-money call option on IBM is .4. The hedge ratio of an at-the-money put option is −.6. What is the hedge ratio of an at-the-money straddle position on IBM?arrow_forwardb) wri fi 2 bj We can eliminate market exposure from our portfolio by shorting S&P500 index. Why bother with futures market? What are the disadvantages of using futures market for hedging?arrow_forward
- Finance 5. Can you replicate the payoff of a call option (create a synthetic call), using a bond, a stock and a put option? If S=$40, X=$40, rf=6%, T=1, and p=$3, how much would it cost to establish this call position?arrow_forwardV You buy a straddle, which means you purchase a put and a call with the same strike price. The put price is $2.80 and the call price is $4.20. Assume the strike price is $75. What is the cost of this strategy? 2. What are the break-even stock pricesarrow_forward1. Consider a family of European call options on a non - dividend - paying stock, with maturity T, each option being identical except for its strike price. The current value of the call with strike price K is denoted by C(K) . There is a risk - free asset with interest rate r >= 0 (b) If you observe that the prices of the two options C( K 1) and C( K 2) satisfy K2 K 1<C(K1)-C(K2), construct a zero - cost strategy that corresponds to an arbitrage opportunity, and explain why this strategy leads to arbitrage.arrow_forward
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