FIN4610 Group 9 (1)

You work on a proprietary trading desk of a large investment bank, and you have been asked for a quote on the sale of a call option with a strike price of $53 and one year of expiration. The call option would be written on a stock that does not pay a dividend. From your analysis, you expect that the stock will either increase to $73 or decrease to $38 over the next year. The current price of the underlying stock is $53, and the risk-free interest rate is 5% per annum. What is this fair market value for the call option under these conditions? Do not round intermediate calculations. Round your answer to the nearest cent.   $

Suppose the current stock price is $50 and you believe that, one year from now, the stock will sell for either $60 (up-state) or $30 (down-state). The yield on a 1-year risk free zero coupon bond is currently 4%. If you want to replicate a call option payoff with an exercise price of $40, how much should you borrow today? (SHOW YOUR WORK)

Stock Y is currently selling for $35. You believe that, one year from now, Stock Y will sell for either $65 (up-state) or $25 (down-state). The yield on a 1-year risk-free zero coupon bond is currently 2.5%. You have a European call option with a 1-year expiration date and an exercise price of $40. If you where to create a strategy that replicates this option, how many shares would you need to buy (shortsell if negative)? In other words, what is the call option delta?

Consider a European call on Procter and Gamble stock (PG) that expires in one period. The current stock price is $120, the strike price is $130, and the risk-free rate is 5%. Assume that PG stock will either go up to $150 (probability = .4), or go down to $90 (probability = .6). Construct a replicating portfolio based on shares of PG stock and a position in a risk-free asset, and compute the price of the call option.

This example is part of "Hedged Portfolios" to minimize risk. Assume you have $7000 to invest; A stock is trading at $100.00. A call option that expires in one year with a strike price of $100.00 is trading at $8.00.   How much is your portfolio's 1-year return if you invest in "Only Options" and the stock price after one year is $54.00? Enter your answer in the following format: + or - 0.1234 Hint: The Answer is between -0.89 and -1.08

You have two options to invest $1000 in: A $1050 face value bond with coupon rate c = i) ii) = 6%. A stock portfolio that you aim to resell at $1100 after receiving a dividend of $50. Then answer the following: a) Which of the two options makes you the highest rate of return? b) Is there any reason why would you want to choose the other?

The current price of a stock is $20. In 1 year, the price will be either $28 or $15. The annual risk-free rate is 7%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below. Find the price of a call option on the stock that has a strike price is of $25 and that expires in 1 year. (Hint: Use daily compounding.) Assume 365-day year. Do not round intermediate calculations. Round your answer to the nearest cent.

Suppose that the current price of Roblox Corporation common stock is (RBLX) is $100. If the price of RBLX will be either $150 or $50 one year from now, what is the price of a call option with a strike price of $120 expiring one year from now? Assume that the current risk free rate is 1%. What is the risk neutral probability of the stock being $150 one year from now?

You now face the choice of investing it in a U.S. Treasury bond that will return $633,000 at the end of a year or a common stock that has a 50-50 chance of being worthless or worth $1,380,000 at the end of the year. The expected rate of return on the T-bond investment is 5.5%. What is the expected rate of return on the stock investment? Round your answer to the nearest whole number.

You consider buying a share of stock at a price of $25. The stock is expected to pay a dividend of $1.50 next year, and your advisory service tells you that you can expect to sell the stock in 1 year for $28. The stock's beta is 1.10,rf is 0.06 and E(rm)= 0.16. What is the stock's abnormal return?   The risk premium for exposure to aluminum commodity prices is 4%, and the firm has a beta relative to aluminum commodity prices of 0.6 . The risk premium for exposure to GDP changes is 6%, and the firm has a beta relative to GDP of 1.2. If the risk-free rate is 4%, what is the expected return on this stock?

The price of Bobco stock is currently $60. In one year, the price will either be s66 or $54. If the one-year risk free rate of interest is 6%, what is the price of a Bobco call option with an exercise price of $61? Recall, you will want to set 66N - 1.06B = 5 as one of the equations you need to solve this problem. You will need to figure out the other equation, then use both equations to solve for N and B. Then, you will price the portfolio of N shares less the amount borrowed. Round your answer to nearest cent. $6 $60 $54

Suppose the current stock price is $50 and you believe that, one year from now, the stock will sell for either $60 (up-state) or $30 (down-state). The yield on a 1-year risk-free zero coupon bond is currently 4%. You have a European put option with a 1-year expiration date and an exercise price of $40. The call option price with the same exercise price with the same maturity date is $14.10. What would be the put option price? (SHOW YOUR WORK)

In a financial market a stock is traded with a current price of 50. Next period the price of the stock can either go up with 30 per cent or go down with 25 per cent. Risk-free debt is available with an interest rate of 8 per cent. Also traded are European options on the stock with an exercise price of 45 and a time to maturity of 1, i.e. they mature next period. Calculate the price of a call option by constructing and pricing a replicating portfolio.

You are thinking of buying a stock priced at $100 per share. Assume that the risk-free rate is about 4.5% and the market risk premium is 6%. If you think the stock will rise to $117 per share by the end of the year, at which time it will pay a $1 dividend, what beta would it need to have for this expectation to be consistent with the CAPM?

Optival’s stock is currently trading at $60 per share with a historical volatility of 20%. The risk-free rate is 4%. Consider a European call and put option on Optival’s stock with an exercise price of $55 that expires in 2 years. Use excel or a similar program to determine the option price using the Black-Scholes formula.   (a): What is the value the European call and put option on Optival’s stock with a strike price of $60?  (b): To the nearest cent, how much does the option value change for the following adjustments to the input values:  ∆ in Call Value ∆ in Put Value  ↑ stock price by $1 to $61  ↑ strike price by $1 to $56  ↑ the rF by 1% to 5%  ↑ volatility by 1% to 21%  ↑ time to maturity by 1 yr  (c): Why does the value of the call increase by less than $1 when the stock price increases by $1?  (d): To the nearest percent and holding all else constant, how high would the risk-free rate need to be for a 1 year increase in time to maturity to have a negative impact on the value of…

A stock is selling today for $110. The stock has an annual volatility of 64 percent and the annual risk-free rate is 7 percent.   c. Calculate the fair price for a 1 year European put option with an exercise price of $95. d. Calculate how much the current stock price would need to change for the purchaser of the put option to break even in one year. e. Calculate the level of volatility that would make a $95 call option sell for $30. (Use Goal Seek or Solver). f. Calculate the level of volatility that would make a $95 put option sell for $8. (Use Goal Seek or Solver).   Please show work using excel

You would like to be holding a protective put position on the stock of XYZ Co. to lock in a guaranteed minimum value of $100 at year-end. XYZ currently sells for $100. Over the next year the stock price will increase by 10% or decrease by 10%. The T-bill rate is 5%. Unfortunately, no put options are traded on XYZ Co.a. Suppose the desired put option were traded. How much would it cost to purchase?b. What would have been the cost of the protective put portfolio?c. What portfolio position in stock and T-bills will ensure you a payoff equal to the payoff that would be provided by a protective put with X = 100? Show that the payoff to this portfolio and the cost of establishing the portfolio match those of the desired protective put.

A stock has a current price of $67. An option on this stock that expires in six months has an exercise price of $65. The stock will pay a dividend of $5 in three months. Assume an annualized volatility of 30% and a continuously compounded risk - free rate of 5% per annum. Use the Black - Sholes - Merton model to price this option. 1) Suppose the option is a European put. Calculate the value of the put. 2) Suppose this option is an American call. Use Black's approximation to calculate the value of this call.

ABC Stock is currently priced at $75. The stock is expected to be worth $85 in one year and you expect to receive a dividend of $2.00 a share. The beta of ABC is 0.90. The risk free rate is 3% and the expected return of the stock market is 10%. Should you invest in ABC stock? What is the fair value estimate for ABC stock today?

You would like to be holding a protective put position on the stock of XYZ Co. to lock in a guaranteed minimum value of $109 at year- end. XYZ currently sells for $109. Over the next year the stock price will increase by 12% or decrease by 12%. The T-bill rate is 6%. Unfortunately, no put options are traded on XYZ Co. a. Suppose the desired put option were traded. How much would it cost to purchase? (Do not round intermediate calculations and round your final answer to 2 decimal places.) Cost to purchase b. What would have been the cost of the protective put portfolio? (Do not round intermediate calculations and round your final answer to 2 decimal places.) Cost of the protective put portfolio c. What portfolio position in stock and T-bills will ensure you a payoff equal to the payoff that would be provided by a protective put with X = 109? Show that the payoff to this portfolio and the cost of establishing the portfolio match those of the desired protective put. (Do not round…

A stock is selling today for $110. The stock has an annual volatility of 64 percent and the annual risk-free rate is 7 percent. Calculate how much the current stock price would need to change for the purchaser of the put option to break even in one year. Calculate the level of volatility that would make a $95 call option sell for $30. (Use Goal Seek or Solver). Calculate the level of volatility that would make a $95 put option sell for $8. (Use Goal Seek or Solver). Please show work in excel.